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Appreciate the deeper context from a practitioner, and no question that they intended to buy individual bonds--as you note, this could have been a much simpler

Appreciate the deeper context from a practitioner, and no question that they intended to buy individual bonds--as you note, this could have been a much simpler program if they intended only/primarily to buy ETFs. I think the question is whether to consider their failure to buy individual bonds as an ordinary bureaucratic delay, or as the emergent but "correct" result? For example, is it just an inconsistency that issuers need to attest that they didn't receive money under the CARES act if their bonds are purchased directly, but not if they're purchased as part of an ETF? Or does that make sense, since it's politically acceptable to support a diversified index, but not to support a specific company that already received other government help? I like the latter choice because it's satisfying and logical, though I understand that the reality is hazier.

whatok 6y ago
I truly believe that it emerged as a bureaucratic screw-up and can see how it evolved to its current state. I think it makes sense that they have a certification process for primary issuance and given CARES act strings attached, I can see how that also got attached to the secondary facility. Requiring issuer certification for secondary purchases was a complete surprise to everyone and the base assumption was that they were going to just follow some sort of index approach. Mentioned before but the ECB does not have any sort of certification process for their corporate program but that corporate program was also not launched at the same time as a huge fiscal program, so politics. I do agree that buying ETFs is "cleaner" for all sorts of reasons. The certification process for bonds vs ETFs is slightly inconsistent but given that they're not going to participate in the create/redeem process, I don't have too much an issue with it. If they were buying ETFs, redeeming them, and then actively managing the bonds from there, then it would be a little more murky. Besides the fallen angel ETFs, none of the ETFs they've bought so far (and everything that qualifies as well) does not have any real issuer concentration that you could argue tremendously favors any particular issuer beyond reflecting the actual bond market. To further expand on the overall topic, if all the Fed did was buy ETFs, there's a real risk that would not be enough. During any crisis, in order to be effective, central banks need to make big moves. To use a crude metaphor, individual bullets fired separately don't have nearly as much impact as a single bazooka round and sometimes you only have a chance for one shot. Bond markets aren't as efficient as equities and without secondary purchases, there could have been a real chance that you had ETFs more or less stabilized but several underlying issuer/sectors/whatever aggregate group continue to be dislocated. For another crude metaphor, sometimes the tail (ETFs) wags the dog on this stuff and vice versa. In order to have functioning markets, you need complete control over the entire animal which would be primary issuance, secondary bonds, and one of the more liquid proxies.
- tripletao 6y ago
  Very interesting, thanks. But if the Fed buys broad ETFs to support the overall index but isolated issuer/sector/whatever prices still fall sharply, is that good or bad? Like cruise ship bonds really should be falling more than tech bonds, and if the Fed pushes up prices of a broad ETF then the market can still decide that on its own (as long as all the changes over the entire index average out to whatever the Fed is targeting). If the Fed buys individual bonds, then they have to decide the relative amounts that they're going to support each subgroup, which seems a lot more politically fraught to me. I understand the idea that if the Fed sees what they perceive as panic selling in a particular sector then they can intervene just there and get more effect per dollar spent, but that judgment seems a lot more controversial the narrower the group benefiting gets.

whatok 6y ago

I truly believe that it emerged as a bureaucratic screw-up and can see how it evolved to its current state. I think it makes sense that they have a certification process for primary issuance and given CARES act strings attached, I can see how that also got attached to the secondary facility. Requiring issuer certification for secondary purchases was a complete surprise to everyone and the base assumption was that they were going to just follow some sort of index approach. Mentioned before but the ECB does not have any sort of certification process for their corporate program but that corporate program was also not launched at the same time as a huge fiscal program, so politics. I do agree that buying ETFs is "cleaner" for all sorts of reasons. The certification process for bonds vs ETFs is slightly inconsistent but given that they're not going to participate in the create/redeem process, I don't have too much an issue with it. If they were buying ETFs, redeeming them, and then actively managing the bonds from there, then it would be a little more murky. Besides the fallen angel ETFs, none of the ETFs they've bought so far (and everything that qualifies as well) does not have any real issuer concentration that you could argue tremendously favors any particular issuer beyond reflecting the actual bond market. To further expand on the overall topic, if all the Fed did was buy ETFs, there's a real risk that would not be enough. During any crisis, in order to be effective, central banks need to make big moves. To use a crude metaphor, individual bullets fired separately don't have nearly as much impact as a single bazooka round and sometimes you only have a chance for one shot. Bond markets aren't as efficient as equities and without secondary purchases, there could have been a real chance that you had ETFs more or less stabilized but several underlying issuer/sectors/whatever aggregate group continue to be dislocated. For another crude metaphor, sometimes the tail (ETFs) wags the dog on this stuff and vice versa. In order to have functioning markets, you need complete control over the entire animal which would be primary issuance, secondary bonds, and one of the more liquid proxies.

tripletao 6y ago
Very interesting, thanks. But if the Fed buys broad ETFs to support the overall index but isolated issuer/sector/whatever prices still fall sharply, is that good or bad? Like cruise ship bonds really should be falling more than tech bonds, and if the Fed pushes up prices of a broad ETF then the market can still decide that on its own (as long as all the changes over the entire index average out to whatever the Fed is targeting). If the Fed buys individual bonds, then they have to decide the relative amounts that they're going to support each subgroup, which seems a lot more politically fraught to me. I understand the idea that if the Fed sees what they perceive as panic selling in a particular sector then they can intervene just there and get more effect per dollar spent, but that judgment seems a lot more controversial the narrower the group benefiting gets.