The Federal Reserve said on Monday it would expand its efforts to support the corporate debt market by buying a “broad and diverse market index” of U.S. corporate bonds in the secondary market.
The central bank says purchases of individual corporate bonds will be used to create a ‘corporate bond portfolio’ that meets the Fed’s existing standards for minimum rating, maximum maturity and other criteria.
Through its secondary market corporate credit facility, the central bank has already purchased exchange-traded funds that include investment-grade debt and high-yield debt. As of June 10, the Fed had acquired about $5.5 billion in corporate bond ETFs.
The Fed plans to supplement secondary market purchases with purchases directly from issuers through a Primary Market Business Credit Facility, which is not yet online.
Both facilities will be backed by $75 billion in equity from the US Treasury, earmarked by Congress’ CARES (Coronavirus Aid, Relief, and Economic Security) Act. The Fed says the support will allow the central bank to increase the facility up to $750 billion.
The central bank says the adjustment will allow the Fed to “support market liquidity and the availability of credit for large employers.”
The Fed had announced the two facilities in late March to ensure companies were still able to tap funding markets during the COVID-19 turmoil.
The updated term sheet continues to require at least investment grade ratings on any corporate debt purchased, with an exception for “fallen angels” which fell to the undesirable level after March 22. Any debt must also have a maturity of five years or less.
Brian Cheung is a Fed, economics and banking reporter for Yahoo Finance. You can follow him on Twitter @bcheungz.
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