Via Wolf Street

It holds just $331 million of junk-bond ETF HYG, among just $12 billion in total corporate bonds and ETFs. But the Fed’s jawboning about breath-takingly huge purchases was enough to drive the bond market, including the junk-bond market, into foaming-at-the-mouth exuberance. Here are the details.

By Wolf Richter for WOLF STREET.

The Fed disclosed yesterday afternoon the amounts and names of the corporate bonds and corporate bond-ETFs that it bought in July. The Fed started buying corporate bonds for the first time ever in June, after having started buying bond-ETFs in May. The amounts are small – measured in millions and single-digit billions – and disappear as rounding errors on the Fed’s overall balance sheet measured in hundreds of billions and trillions.

Corporate bond purchases and holdings.

Over the month of July, the Fed purchased $1.8 billion in corporate bonds. This brought its total holdings of corporate bonds at the end of July to $3.55 billion. Of these holdings, 2.9% were BB-rated junk bonds, or about $110 million (with an M). The rest were investment-grade: 41.8% rated A, AA, or AAA; and 55.3% rated BBB.

The Fed spread these bond purchases in July over hundreds of companies in 753 small individual trades, with most trades amounting to the low single-digit-million dollars.

The largest trades – and the only three trades in the double-digit-million dollars – were a Pfizer bond purchase of $10 million, a CVS Health Corp bond purchase of $12 million, and an AT&T bond purchase of $10 million.

For example, it bought $33 million of Apple bonds in July, spread over 8 trades, on four different trading days, involving six different bond issues (six different CUSIP numbers):

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Company CUSIP Number
Trade Date Amount
Apple Inc 037833AK6 07/01/2020 $2,124,240
Apple Inc 037833AR1 07/01/2020 $7,186,970
Apple Inc 037833BS8 07/01/2020 $2,039,445
Apple Inc 037833DV9 07/01/2020 $4,047,263
Apple Inc 037833DL1 07/10/2020 $3,110,275
Apple Inc 037833AK6 07/13/2020 $4,242,760
Apple Inc 037833CG3 07/13/2020 $4,384,360
Apple Inc 037833DV9 07/20/2020 $4,049,837

Which rases the question: Why does the Fed buy any Apple bonds? Apple has zero problems issuing bonds at near-Treasury yields. For example, its 2.4% 10-year notes due in May 2023 (therefore trading like less-than-two-year notes) last traded with a yield of 0.39%. Why does the Fed buy any corporate bonds, period?

That was a rhetorical question. The Fed does whatever it does to widen the wealth disparity to the maximum extent possible. That has been its guiding principle, and with great success.

Nevertheless, it hasn’t bought much. Just going through the motions. Its verbiage alone was enough to trigger a breath-taking corporate bond market rally.

The companies range across the spectrum, from cigarette-maker Altria to medial device company Zimmer Biomet Holding. The Fed’s holdings are spread over the 12 bond market sectors. Note that its largest sector holdings (consumer non-cyclical) amounts to just $680 million; and its smallest sector holdings (non-bank/insurance financials) amounts to just $68 million:

Broad Market Index Sector Par Value  % of total
Consumer Non-Cyclical $680,000,000 20.3%
Consumer Cyclical $544,500,000 16.3%
Utilities $345,000,000 10.3%
Energy $316,000,000 9.4%
Technology $310,000,000 9.3%
Insurance $271,000,000 8.1%
Communications $259,500,000 7.8%
Capital Goods $248,000,000 7.4%
Basic Industry $120,500,000 3.6%
REITs $99,000,000 3.0%
Transportation $87,000,000 2.6%
Non-Bank/Insurance Financials $68,500,000 2.1%
Total $3,349,000,000 100%

The bond purchases include the US entities of foreign companies, including a slew of finance entities of German, Japanese, and Korean automakers, such as these:

  • Volkswagen Group of America Finance LLC: $34 million in eight trades;
  • Toyota Motor Credit Corp: $32 million in 8 trades;
  • Daimler Finance North America LLC: $38 million in 12 trades
  • BMW US Capital LLC: $30 million in 9 trades
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Among the junk-rated bonds the Fed bought in July are:

  • $5.6 million of Ford Motor Company bonds, in two trades;
  • $13 million of Sabine Pass Liquefaction bonds, in five trades.

Moody’s rates both of them Ba2, which is two notches into high-yield (here is my cheat sheet for corporate credit ratings by ratings agency)

Bond ETF purchases and holdings.

Over the month of July, the Fed bought just $520 million in bond ETFs, bringing its total holdings of bond-ETFs at the end of July to $8.7 billion, spread over 16 ETFs, including small holdings of high-yield ETFs, including just $331 million of HYG.

Ticker Fund Name # of Shares
Total holdings, market value, on July 31
ANGL VanEck Vectors Fallen Angel High Yield Bond ETF 1,129,770 $34,616,153
HYG iShares iBoxx High Yield Corporate Bond ETF 3,875,790 $330,953,708
HYLB Xtrackers US Dollar High Yield Corporate Bond ETF 1,644,970 $80,504,832
IGIB iShares Intermediate-Term Corporate Bond ETF 8,046,720 $493,988,141
IGSB iShares Short-Term Corporate Bond ETF 12,448,466 $685,288,053
JNK SPDR Bloomberg Barclays High Yield Bond ETF 5,285,048 $560,743,593
LQD iShares iBoxx US Dollar Investment Grade Corporate Bond ETF 17,860,663 $2,471,022,726
SHYG iShares 0-5 Year High Yield Corporate Bond ETF 685,850 $30,472,316
SJNK SPDR Bloomberg Barclays Short Term High Yield Bond ETF 1,220,506 $31,794,181
SLQD iShares 0-5 Year Investment Grade Corporate Bond ETF 841,975 $44,026,873
SPIB SPDR Portfolio Intermediate Term Corporate Bond ETF 13,181,447 $486,922,652
SPSB SPDR Portfolio Short Term Corporate Bond ETF 8,954,460 $281,438,678
USHY iShares Broad US Dollar High Yield Corporate Bond ETF 1,555,865 $62,281,276
USIG iShares Broad US Dollar Investment Grade Corporate Bond ETF 2,997,120 $185,821,440
VCIT Vanguard Intermediate-Term Corporate Bond ETF 14,875,069 $1,440,352,931
VCSH Vanguard Short-Term Corporate Bond ETF 18,237,015 $1,515,495,947
Total $8,735,723,499

How does this square with the SPVs on the Fed’s balance sheet?

On its balance sheet, the Fed shows $44 billion in its “Corporate Credit Facility” Special Purpose Vehicle, which is the SPV where these corporate bond and bond-ETFs are held.

But as we’ve seen above, at the end of July, the Fed held only $8.74 billion in corporate bond ETFs and $3.55 billion in corporate bonds, for a total of $12.3 billion.

And the remaining $32 billion ($44 billion – $12 billion) in the SPV on the balance sheet? Nearly all of it is the unused portion of “equity investment” from the Treasury Department. The Treasury’s total equity investment was $37.5 billion. It just sits there.

So given all the hoopla surrounding the Fed’s jawboning about massive huge breath-taking purchases of corporate bonds and bond ETFs, this is pocket change — $12 billion in total. But the hoopla was enough to drive the bond market, including the junk-bond market, into foaming-at-the-mouth exuberance that continues to this day.

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