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Expert Opinions

The Fed’s huge debt-buying programme continues unabated

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Lyxor Asset Management’s Deputy CIO Florence Barjou discusses how the Fed’s massive corporate debt-buying programme is evolving. 

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The Fed’s huge debt-buying programme continues unabated

With the corporate debt market growing rapidly, will the Fed continue to support the ‘Fallen Angels’?

On March 23, the US Federal Reserve announced that it would start direct purchases of corporate debt – an unprecedented rescue of corporate America. 

Companies eligible at the beginning of the programme – even if their status has since deteriorated from “Investment Grade” to “High Yield” or so-called “Fallen Angels” – will continue to be supported. 

The economic impact of the crisis, and the Fed’s response, has led American companies to issue debt on an unprecedented scale. Indeed, the first six months of 2020 have exceeded the whole of 2019. 

Right now, the debt-buying programme is worth $250 billion, but in all likelihood, the Fed won’t hesitate to make it much bigger. 

And if private investors get cold feet and decide to pull out, the Fed will most likely step in to plug the gap. 

How has the FED’s rescue programme for Covid-stricken companies evolved since the hight of the crisis? 

The March 23 announcement brought a surge of relief to markets. So far, these purchases have been overwhelmingly in ETFs. 

However, US companies that needed liquidity needed to make explicit requests to the Fed before any action was taken, and this was seen as a sign that these companies were already struggling to stay afloat. 

Things have evolved, and since June 15, the Fed has been buying debt bonds directly via an index-based approach. 

So, while companies had originally feared strict conditions for eligibility in the programme, the entire market can now receive massive and indiscriminate injections of liquidity, without blotting the image of individual companies, and while driving down the cost of the debt.