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The Fed Is Now Buying Investment Grade Bond ETFs Like LQD
Over the weekend, we reported that virtually all of Wall Street was praying for nothing short of divine intervention from the Fed, but would be content with the announcement of corporate bond buying, such as Bank of America..and Deutsche Bank. On Monday morning, that's precisely what they got when the Fed announced that it would indeed start purchasing corporate bonds. And in a way, the Fed exceeded expectations, because unlike the ECB which only buys bonds in the primary market, the Fed announced that in addition to a Primary Market Corporate Credit Facility, it would also buy Investment Grade bonds in the secondary market. Here are some details: as was widely expected, the Fed created a SPV that will purchase in the secondary market corporate debt issued by eligible issuers. What is more interesting is that the SPV will purchase eligible individual corporate bonds as well as eligible corporate bond portfolios in the form of exchange traded funds (“ETFs”) in the secondary market. In other words, the Fed is now active in the equity market, even if focusing only on securities collateralized by IG bonds (for now).
Completing the SPV details, the NY Fed announced that will be secured by all the assets of the SPV, in order not to be susceptible to a capital loss (unlike the BOJ which has suffered trillions in paper losses on its equity ETFs). The Department of the Treasury, using the Exchange Stabilization Fund, will make an initial $10 billion equity investment in the SPV in connection with the Facility. But going back to the key point, here was the highlight of the term sheet:
Eligible ETFs. The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.
In other words, as of this moment the NY Fed will be actively buying the LQD ETF (and various other IG version) to stabilize the corporate bond market.
Hello Japan!-they have been doing this for many years-own about 70% of the entire ETF market on the nikkei
The cap is interesting, as it amounts to 10% of maximum bonds outstanding of any specific issuer, and the Fed is also limited to 20% of any ETF-like they will play by the rules-rules are for us not them. And notably, while LQD soared in early trading, it has since given up much of its gains-allowing an exit for the big boi's
https://www.zerohedge.com/markets/fed-now-buying-investment-grade-bond-etfs-lqd
VENUS62 G5 up from JBA and southeast and SAM563 G5 north from MacDill AFB, Tampa
MAGMA89 up from San Juan, PR-heading for Homestead ARB
RSAF SLMAN77 C-130 Hercules out of Dhahran-King Abdulaziz AB-and he was not their for very long, went in about 30 minutes ago. Out now heading to back to Riyadh
Fed Will Limit Buybacks & Dividends For Companies Using Its Credit Facility
In the term sheet for its Primary Market Corporate Credit Facility which greenlighted the Fed to purchase investment grade bonds and issue loans directly to eligible issuers in the primary market (as opposed to the secondary market where the Fed will also buy IG ETFs such as the LQD), it had the following restrictive language:
At the borrower’s election, all or a portion of the interest due and payable on each interest payment date may be payable in kind for 6 months, extendable at the discretion of the Board of Governors of the Federal Reserve System. Such interest amount will be added to, and made part of, the outstanding principal amount of the bond or loan. A borrower that makes this election may not pay dividends or make stock buybacks during the period it is not paying interest.
Said otherwise any company that takes advantage of the Fed's PMCCF and then elects to suspend payments on interest and/or principal by converting these to PIK payments, effectively adding them to the loan principal, will not be allowed to buyback stocks or issue dividends. Which is good. What is not good is that the inverse is also true: the Fed is not limiting buybacks or dividends for companies that borrow money directly from the Fed as long as they remain in compliance with paying their interest on time.
In other words, while the Fed is trying to appear draconian in its "negative covenants", it is also saying that companies that remain solvent and liquid can use any amount of proceeds sourced directly from the Fed, and use them to repurchase stock!
https://www.zerohedge.com/markets/buyback-backlash-begins-fed-will-limit-buybacks-dividends-companies-using-its-credit
this is what they did NOT do in 2008 forward-but this is still quite vague as it still allows much wiggle room-it's step in the right direction.
sperging because all the mkt participants are now realizing the FRBNY is the buyer of last resort.
fuck him. The sole reason I no longer have it. $800 a month is not affordable