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Besides launching the Main Street Lending Program and purchasing the exchange-traded funds, in an effort to provide additional economic relief, the Federal Reserve has recently released the list of 750 companies it will purchase corporate bonds directly from. The Fed has spent around $429 million buying bonds from 86 of these companies, including big corporations such as AT&T, Microsoft, Walgreen’s, and will continue to buy more in upcoming months. 

 

Back in March when the COVID-19 pandemic broke out, the financial market was already at stake as global corporate debt reached 92% of GDP, while in America, non-financial corporate debt rose to 47% of GDP compared to 43% a decade ago.

With the hit of COVID-19, the energy industry which makes up 8% of bond market in America was in trouble, as well as other corporations. Starting from early March, the corporate bond spreads began to rise. In May, it was recorded that new bond issuance by companies with investment-grade ratings reached $1 trillion in less than five months. 

 

In an attempt to calm the market, the Fed announced in March that it would purchase up to $750 billion of corporate bonds, with the hope that this will encourage investors to purchase bonds, decreasing the credit spread and enabling corporates to issue more bonds. Since the announcement of the Fed, credit spreads have decreased gradually, despite still higher than levels before COVID-19. 

There has also been significant bond issuance of $497 billion in March and April as investors have more trust in purchasing these bonds with the direct support from the Fed.

 

Most of these changes occur before the Fed’s actual purchases of these corporate bonds, so we can expect more positive trends in the market in upcoming months. 

 

Sources: 

The Fed reveals which companies make its corporate-bonds shopping list (https://fortune.com/2020/06/29/fed-buying-corporate-bonds-apple-walmart-exxonmobil/)

A sea of debt (https://www.economist.com/finance-and-economics/2020/03/12/corporate-bonds-and-loans-are-at-the-centre-of-a-new-financial-scare)

The Fed’s Corporate Bond-Buying Programs: FAQs (https://www.schwab.com/resource-center/insights/content/feds-corporate-bond-buying-programs-faqs)

 

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