[Couldn't quote both articles in their entirety, as it exceeded the 9000 char limit on posts].
Not a finance guy (but any finance guys out there please feel free to explain) so unsure about all of the implications with these moves by the Fed, but it looks like the Fed finance guys believe IBM's bonds fall into the high-quality corporate bonds category. Seems then that by purchasing IBM's bonds, that helps IBM reduce their borrowing cost. Wonder if there was some backroom discussion about this move prior to IBM selling $20bn in bonds to fund it's Red Hat acquisition?
The 15 companies with the most debt in the index, BMO estimates, are likely to be the following,
ranked according to the amount included: AT&T (T); Apple (AAPL); Comcast (CMCSA); Verizon
Communications (VZ); Microsoft (MSFT); Anheuser-Busch InBev (BUD); AbbVie (ABBV); CVS Health
(CVS); Oracle (ORCL); General Electric (GE); General Motors (GM); Duke Energy (DUK); Ford Motor
(F); International Business Machines (IBM); and Walmart (WMT).
https://www.barrons.com/articles/fed-bond-buying-plan-who-gains-corporate-debt-coronavirus-51592506224
By: Alexandra Scaggs June 18, 2020 2:52 pm ET
The Federal Reserve released news this week that markets found encouraging: It is creating an index of bonds that meet its standards, and will use it as a blueprint for a portion of its debt purchases.
The new index won’t expand the potential size or reach of central-bank stimulus. But it will ease some of the burden on U.S. companies that may want the Fed to buy their bonds. A look at how it is supposed to work, and what it is meant to achieve, offers clues about what companies are likely to benefit.
The most obvious benefit is that it reduces companies’ paperwork requirements. Outside of the index-based purchases, companies that want the Fed to buy their bonds need to certify they are eligible for the central bank’s secondary-market purchases. But companies with bonds in the index don’t need to proactively make those certifications.
“Having a large percentage of hundreds of American corporations certify compliance was very difficult from an operational standpoint to begin with,” wrote strategists at BMO Capital Markets in a recent note. “Without certification, the Fed was potentially left with a huge liquidity facility that wasn’t allowed to buy anything but [exchange-traded funds],” which it has been buying for weeks.
Beyond that, the index solves a couple of problems with the optics of the facility. First, it precludes the argument that the Fed is picking winners and losers in the market. It also reduces the risk that companies’ reputations could be damaged if they received help from central bankers.
“Higher-rated issuers were likely to carefully weigh the benefits of certifying against the potential political costs of being perceived as requesting support from the Fed,” Citigroup’s credit strategists wrote in a recent note. “By removing this certification requirement, the Fed will now apparently determine for itself each issuers’ eligibility.”
To be included in the Fed’s index, a bond must mature in five years or less. And the company that issued it must be based in the U.S., rated investment grade (as of March 22), and not have taken any other coronavirus aid from the government. The index also won’t include bonds issued by banks. And importantly, the Fed will only buy 10% of the amount of debt each issuer has outstanding.
Once all those rules are applied, the Fed’s index will likely include about $455 billion of U.S. corporate bonds, according to the BMO strategists. That means the entire index would be smaller than the $750 billion limit the Fed has imposed on its corporate-bond purchases,
Compared to investors who own investment-grade bond indexes today, the Fed will be buying a relatively larger share of bonds issued by consumer companies and real-estate investment trusts.
The Fed’s index will also have smaller positions in bonds of industrial and energy companies than the broader market, BMO says. Industrial bonds tend to have longer maturities and foreign issuers, and 40% of energy bonds are issued by foreign companies.
BMO says that the Fed could end up buying issuers’ newer bonds, because many older bonds don’t trade often.
“We suspect that within the sectors discussed above, the SMCCF will favor certain issues over others, and that liquidity will be the most important quality that dictates Fed corporate bond buying,” BMO’s strategists wrote in a recent note, referring to the bank’s Secondary Market Corporate Credit Facility.
“This should generally favor the largest issuers and recently issued debt. This could provide additional rationale to think that new issues will continue to be extremely well-subscribed at narrow spreads.”
There is a chance the Fed could take a different approach, however. Because its stimulus effort is meant to help smooth the market’s functioning, the Fed could decide to buy older bonds because they are less liquid.
The 15 companies with the most debt in the index, BMO estimates, are likely to be the following, ranked according to the amount included: AT&T (T); Apple (AAPL); Comcast (CMCSA); Verizon Communications (VZ); Microsoft (MSFT); Anheuser-Busch InBev (BUD); AbbVie (ABBV); CVS Health (CVS); Oracle (ORCL); General Electric (GE); General Motors (GM); Duke Energy (DUK); Ford Motor (F); International Business Machines (IBM); and Walmart (WMT).
The Fed can spend up to $750 billion buying corporate bonds and bond ETFs, depending on the investments it chooses to buy. It isn’t yet clear how much of those purchases will be guided by the index.
**
The Fed Is Buying More Auto Makers’ Bonds Than Wall Street Expected –
https://www.barrons.com/articles/summer-surge-in-new-covid-19-cases-could-prompt-more-stimulus-payments-51593700288
By: Alexandra Scaggs June 29, 2020 11:59 am ET
Nearly 55% of the Fed’s index is made up of bonds rated in the three tiers above junk. Those bonds, known as the BBBs, have made up a growing share of the market in recent years. As of June 16, about 58% of the bonds bought by the Fed were rated in that group.
Early Monday, the Federal Reserve Bank of New York also published trade-level data for $429 million of bonds bought on June 16 and 17.
The Fed appeared to focus on the longer end of the maturity range within its mandate. The central bank can buy bonds maturing in five years or less. About 36% of the bonds the Fed purchased will mature in four to five years, while less than 20% of the bonds will mature in two years or less, according to CreditSights.
The central bank’s largest purchases were of bonds issued by UnitedHealth Group (UNH), AT&T (T),
Anthem (ANTM), Comcast (CMCSA), and IBM (IBM).
Those positions ranged between $15 million and $10 million, however, which isn’t a large amount
of debt compared with the amount the issuers have outstanding.
UnitedHealth had nearly $36 billion of long-term debt outstanding on March 31, while AT&T had
$147 billion. Anthem, Comcast, and IBM had $19 billion, $101 billion, and $53 billion of long-term
debt, respectively, at the end of the first quarter.
And the total $750 billion size of the Fed’s facility is just a fraction of the nearly $10 trillion corporate bond market. That could be why strategists at Bank of America asked this month if the Fed’s corporate bond-buying facilities are a “pea shooter in bazooka clothes.”
Of course, that is still more aggressive than the Fed’s municipal bond-buying effort. In mid-June it had reported just one transaction: A June 2 purchase of $1.2 billion of debt directly from the state of Illinois, according to Federal Reserve data.