Fed to start buying debt from corporations in expansion of rescue effort
The Federal Reserve said that on Tuesday it will begin buying debt from large corporations as part of a massive effort to cut their borrowing costs as the economy reels from the coronavirus pandemic.
The Fed is going to create an index of U.S. corporate bonds that it will purchase on the open market as long as they meet eligibility standards — an approach that will spare the companies from having to seek aid directly from the central bank.
The goal of the $750 billion emergency lending program is to keep cash flowing in the markets and support “the availability of credit for large employers,” the Fed said on Monday. Stocks rose on the news, reversing sharp losses earlier in the day.
The announcement represents a shift in strategy for the central bank, which was previously only going to buy individual bonds issued by companies that approached it directly. Now the Fed will buy bonds of all eligible companies, whether they ask or not.
It’s the latest move by the Fed to revive an economy that fell into recession in February and has seen tens of millions of people thrown out of work as the fallout from the coronavirus shut down much of the country’s business activity.
Earlier Monday, the Fed also kicked off its long-awaited $600 billion emergency lending program for midsize businesses, announcing that banks can now register to participate.
Under that so-called Main Street program, the Fed will buy 95 percent of a bank loan to a company with up to 15,000 employees or up to $5 billion in annual revenue, although it’s primarily designed to help firms too large to qualify for the government-backed Paycheck Protection Program loans for small businesses.
The Treasury Department has set aside a total of $150 billion for these two programs to cover any losses in case borrowers default, a significant chunk of the $500 billion set aside in the March coronavirus relief package for businesses and municipalities.
Under the corporate bond purchasing program, most of the debt has to be considered investment-grade by credit ratings services, meaning it carries minimal risk to investors. But otherwise eligible firms that have been downgraded a notch to junk status since late March will still be included in the program.
The central bank had already been making indirect investments in corporate bonds by buying exchange-traded funds, which are securities that track an underlying group of assets.