On March 23 - the day the S&P dropped to its cycle low of 2,237 - the Fed stunned capital markets when it announced it would purchase investment grade corporate bonds, traversing a Rubicon into secondary market intervention that not even Ben Bernanke had dared to cross. A few weeks later, on April 9, the Fed doubled down by announcing it would purchase not only junk bonds from "fallen angel" issuers (an announcement which came just days after a quarter in which a record $150BN in investment grade bonds were downgraded to junk, starting the long awaited tsunami of "fallen angels"), but would also buy junk bond ETFs such as HYG and JNK.
This is what the Fed's Secondary Market Corporate Credit Facilities term sheet said on this topic:The Facility also may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market for U.S. corporate bonds. The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds
Naturally, the news cheered beaten down markets, and was enough to send junk bond ETFs such as JNK and HYG soaring.
One month later, following a surge in inquiry including from the bond king Jeff Gundlach as to when the Fed would actually start buying corporate bond ETFs, the Fed realized it would not be able to jawbone markets any more and would have to put its money where its term sheet was, and on May 11 the NY Fed said it would "begin purchases of exchange-traded funds (ETFs) on May 12."
And while the central bank said the focus of its ETF purchases would be on IG-focused ETFs, the New York Fed also disclosed it would start buying junk bonds ETFs as well:As specified in the term sheet, the SMCCF may purchase U.S.-listed ETFs whose investment objective is to provide broad exposure to the market f...