NY Fed says it will begin to sell corporate bond ETFs on June 7

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington
FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid/File Photo

June 3, 2021

By Jonnelle Marte and Kate Duguid

(Reuters) -The Federal Reserve will start to gradually offload its portfolio of exchange-traded funds that invest in corporate bonds on June 7, the first step in unwinding corporate bond holdings acquired during the pandemic, the New York Fed said on Thursday.

The central bank announced on Wednesday that it would begin to sell the modest corporate bond portfolio it built up last year through an emergency lending program launched to backstop credit markets at the height of the pandemic.

The Secondary Market Corporate Credit Facility ultimately saw little use, but Fed officials said establishing it helped to restore market confidence and kept credit flowing to households and businesses. The announcement regarding the facility, which shut down at the end of last year, was viewed as confirmation that markets are now stable.

The announcement that the central bank is unwinding its portfolio “indicates that the Fed views the corporate bond market as fully healed and I would agree,” said David Del Vecchio, U.S. corporate investment grade bond portfolio manager at PGIM.

As of April 30, the facility had $13.8 billion of debt outstanding, including about $8.6 billion of corporate bond ETF holdings and $5.2 billion of corporate bonds, according to Fed data.

The Fed said the sale of its corporate bond portfolio will be “gradual and orderly,” taking into account daily liquidity and trading conditions.

The New York Fed, which manages the corporate credit facility, said it will start selling its corporate bond holdings later this summer and will provide more details before those sales begin. The central bank expects to complete the sale of its corporate bond portfolio by the end of 2021.

The reaction to the Fed’s announcement in the corporate bond market was minimal and the process was not expected to have a major effect on bond markets. At midday in New York all but one of the 16 corporate bond ETFs held by the Fed was trading modestly lower following the announcement, down by between 0.05% and 0.35%.

“The sales will be tiny compared to the overall corporate market,” said Tom Graff, head of fixed income at Brown Advisory.

A Fed official said on Wednesday that the decision to wind down the corporate credit facility was unrelated to monetary policy. The central bank is separately buying $120 billion a month in government securities to support the economy as part of its monetary policy and will have to decide when to start reducing those purchases.

(Reporting by Jonnelle Marte; Editing by Jonathan Oatis and Andrea Ricci)