The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility (SMCCF), an emergency lending program that to date has purchased only exchange-traded funds (ETFs).

The central bank also spelled out for the first time how it plans to implement its buying strategy, saying it will follow a diversified market index of U.S. corporate bonds created expressly for the facility. The Fed built the index internally, and a spokesman couldn't immediately say whether its details would be made public.

"This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility's minimum rating, maximum maturity, and other criteria," the Fed said in a statement. "This indexing approach will complement the facility's current purchases of exchange-traded funds."

The creation of the index removed a potential hurdle for companies that would have had to certify that they were in compliance with restrictions outlined for the program.

Investors Cheer

U.S. stocks climbed after the announcement. BlackRock's iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund, the largest credit ETF, jumped 1.9 percent to hit session highs, while the iShares iBoxx High Yield Corporate Bond ETF climbed as much as 1.6 percent.

The cost to protect investment-grade corporate debt against default dropped the most since April 9, when the Fed expanded the scope of its bond-buying program to include some high-yield debt.

"It's a significant positive," said Dominique Toublan, head of U.S. credit strategy at BNP Paribas SA. "The main reason is that they removed the requirement that issuers certify their eligibility. Many investors were worried that this would impair the ability of the Fed to buy bonds."

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion, it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

The New York Fed said in a separate statement that purchases of bonds from eligible sellers will begin on Tuesday.

Investors Cheer

See also:

Instant Insights /

Fed Will Begin Buying Broad Portfolio of Corporate Bonds

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