The Fed Set to Begin its High Yield Shopping Spree

Since announcing their bold quantitative easing plan to purchase corporate debt, including high yield bonds, the Federal Reserve now appears ready to go on that high yield shopping spree. That shopping list does in fact include exchange-traded funds (ETFs), which should spur interest in bond-focused funds.

“The Federal Reserve unfroze the corporate credit markets — without even firing a shot,” a CNN Business article noted. “On March 23, the Fed dramatically stepped up its efforts to prevent a coronavirus depression by promising to set up a first-ever special entity to buy corporate bonds and ETFs. The US central bank later added junk bonds and junk bond ETFs to the list of assets that would get scooped up.”

“That promise had a profound impact — even though the US central bank has not yet directed the purchase of a single corporate bond,” the article added. “The Fed’s words alone helped restore Corporate America’s access to borrowing markets. Even troubled companies slammed the pandemic such as Carnival, Boeing and Ford were able to borrow vast sums of money.”

Now comes the time where the Fed’s actions need to back up their words. Of course, the question is when?

“Action is coming soon, though,” the article said. “The New York Fed, which is quarterbacking the Fed’s bond-buying programs, announced Monday that the Secondary Market Corporate Credit Facilities (SMCCF) is expected to begin buying corporate bond ETFs in early May. Corporate bond purchases will come “soon thereafter.” And a separate Fed facility, the Primary Market Corporate Credit Facility (PMCCF), is also expected to launch soon. But the Fed has not actually begun to buy bonds yet, despite the dramatic impact on markets.”

That said, investors can beat the Fed to the punch with high yield exposure via exchange-traded funds (ETFs). For those seeking income, getting high yield exposure via junk-rated debt can give investors the yield they seek while the Fed backstops the bond market.

Investors looking at high yield options can opt for The High Yield ETF (NYSEArca: HYLD), which seeks high current income with a secondary goal of capital appreciation by selecting a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations, such as loans, bonds, debentures, notes, and commercial paper.

Another option is the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM), which seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.

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