Supporting credit markets, the Federal Reserve said it will begin purchasing corporate bond exchange traded funds in early May.
The Fed could soon begin two corporate lending programs that would purchase up to $750 billion in debt and related ETFs under its emergency coronavirus actions, Bloomberg reports.
The New York Fed will begin purchasing shares of eligible ETFs in early May through its Secondary Market Corporate Credit Facility, and lending through the Fed’s Primary- and secondary-market corporate credit facilities will follow shortly after.
Investors have already piled on to corporate bond ETFs in anticipation of the Fed’s support in the credit markets. For example, among the most popular plays, investors have turned to the iShares iBoxx Investment Grade ETF (LQD), iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Bloomberg Barclays High Yield Bond ETF (JNK).
“We’ve seen massive inflows into the broad-based investment-grade corporate-bond ETFs, most notably LQD, which in a matter of weeks saw 25% organic growth—driven by billions of dollars of net new inflows,” Ben Johnson, director of global ETF research at fund-trackers Morningstar, told the Wall Street Journal.
These are the largest and most liquid bond ETFs in their respective categories.
The New York Fed stated it “will generally not purchase shares of an ETF that are trading at a premium” of 1% above its net asset value. So, officials are looking for products that are closely tracking their underlying holdings.
“These limits will serve the dual purpose of avoiding overpayment for an ETF relative to the cost of purchasing its underlying assets, and avoiding contributing to elevated demand that an ETF may already be experiencing, while affording operational flexibility,” the New York Fed added.
On the other hand, investors may also consider the VanEck Vectors Fallen Angel High Yield Bond ETF (NASDAQ: ANGL). and Xtrackers Low Beta High Yield Bond ETF (NYSEArca: HYDW) as two alternative plays for the junk bond sector. ANGL and HYDW focus more on higher-rated junk bonds or less junky speculative-grade debt. This area may find greater support as the Fed focuses on less risky speculative-grade corporates.
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