The Federal Reserve will gradually sell corporate bonds purchased during the epidemic

The Federal Reserve announced that it will gradually sell the corporate bonds and ETFs it urgently bought during last year’s epidemic to boost the market and reduce corporate borrowing costs.
The Federal Reserve said it would begin selling corporate bonds and fixed income funds it bought last year to stabilize the financial system, removing unprecedented emergency measures. These measures have boosted the market and helped businesses hit by the epidemic reduce their borrowing costs.
The US central bank said on Wednesday it would gradually sell assets acquired through the secondary market corporate credit facility (smccf). A Fed official said the goal was to complete the sale by the end of the year.
The tool combines funds from the U.S. Treasury with the Federal Reserve’s own resources to buy corporate bonds and exchange traded funds (ETFs) in the secondary market. The tool was launched in April last year along with 12 other tools to support a range of bond markets that are under severe pressure as the US economy closes.
According to the Federal Reserve, smccf and another tool designed to support the primary corporate credit market use less than $14 billion, less than 2% of the $750 billion available.
The Fed said the limited amount of money it used proved that it had succeeded in helping the market to get back to work quickly just by promising support. Corporate bond prices have risen, and the door of the capital market has remained open to enterprises affected by the epidemic.
The Fed also cut interest rates to zero and promised to buy unlimited amounts of treasury bonds.
The Federal Reserve said in a statement on Wednesday: “it has proved that SMCCF played a crucial role in helping the market resume operation last year, supporting large employers during the period of COVID-19, and boosting employment.
“The sale of the smccf portfolio will be gradual and the objective is to minimize the possibility of adverse impact on market operation by taking into account the daily liquidity and trading conditions of ETFs and corporate bonds.”
Investors largely ignored the announcement, in part because the Fed’s actual presence in the market was quite limited. According to a decision of the US Treasury Department, new purchases of the tool have stopped since the end of December last year.
Patrick Leary, a senior trader at incapital, said: “it’s hard to imagine a more effective tool to drive credit to companies during an epidemic.”
Fed officials are also beginning to discuss when they may consider phasing out other emergency measures implemented during the crisis, including $120 billion a month in government bond and mortgage bond purchases.
Mr Leary said the statement on smccf paved the way for the above discussions and the eventual cancellation of policy support.
“It’s just a small step and a good way to test how the market will react,” Leary said

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