The Fed revealed the breakdown of its ETF holdings for the first time on Friday, eliciting derision from critics, who digitally shouted about “moral hazard” and pretended to be incredulous, despite having two months to come to terms with the reality of Jerome Powell backstopping the corporate credit market.
If there was anything surprising in the details, it was the number of ETFs the Fed bought – 15.
Predictably, the largest holding is LQD (the most popular IG credit product). The Fed’s position was worth some $326 million as of May 19. Next is a Vanguard intermediate-term IG vehicle, and another Vanguard fund catering to short-term high-grade corporate debt.
The Fed purchased a half-dozen of the biggest products catering to high yield, including HYG and JNK, two widely-used “mom and pop” (so to speak) junk ETFs. Powell’s combined position in the two was worth around $190 million as of the reporting date.
About 17% of the portfolio is in junk bonds. The pie chart gives you a better sense of things.
As noted, these figures are current through May 19. The latest balance sheet update (from Thursday evening) shows the Fed’s total holdings of corporate credit ETFs sat at $2.98 billion as of Tuesday, up from $1.8 billion the previous week.
The buying began on May 12.
There’s endless fodder for Fed jokes here, but I suppose I’m less inclined to engage given how obvious the punchlines are. For example, among the top issuers in LQD’s holdings are Bank of America, JPMorgan, Citi, Goldman and Morgan Stanley. So, this just adds another incestuous layer to a situation that was already absurdly self-referential, whether you’re talking about the new facilities and programs, or just “plain” old QE and the primary dealer middlemen.
With HYG, the Fed is getting exposure to debt from Tenet, Sprint, T-Mobile, Netflix, Avis, Ford, Kraft Heinz, Navient, Six Flags, Toll Brothers and, “naturally”, Uber. (I know. I know.)
Again, there are plenty of objectively silly aspects to this, and it’s a veritable punching bag for those inclined, but you’re (strongly) encouraged to bear in mind that there is a rationale behind it. If you are not apprised of that rationale, there is no better explainer than “Fed Engineers $1 Trillion Miracle In US Corporate Bond Market“.
That linked post got lost in the shuffle on Thursday, but it makes a variety of important points about the extent to which the Fed was successful in keeping capital markets open to issuers, who were able to fund themselves as opposed to, say, asking Washington for a taxpayer bailout.
$1 trillion in blue chip debt has already been sold in 2020, a pace so blistering it boggles the mind.
Of course, there are risks, not least of which is that corporate America came into the pandemic with too much debt anyway, so piling more on top could mean problems down the road. But for now, it allows companies to build a cash cushion to help ride out the storm.
The Fed’s two corporate credit facilities are what made that possible, and up until May 12, the Fed hadn’t spent a dime.
Commenting during (another) online event Friday, Powell conceded that the Fed has “crossed a lot of red lines” with its emergency actions. Needless to say, critics charge that purchasing credit ETFs is the reddest of those scarlet boundaries.
And yet, Powell contends (rightly) that the actions were necessary. The Fed doesn’t want an active role in managing portfolios, he said, adding that the balance sheet “can’t go to infinity”.