Invesco Canada blog

Insights, commentary and investing expertise

Michael Hyman, Matt Brill and Steven Thomson | May 26, 2020

Fed to purchase corporate bonds through ETFs

On March 23, the U.S. Federal Reserve (Fed) announced its intent to acquire investment grade corporate bonds. The purpose of the communication was to support a market in which sharp price declines were threatening to disrupt the normal functioning of primary (new issue) and secondary market activities. On April 9, the Fed announced an expanded definition of bonds eligible for purchase to include those with investment grade ratings as of March 23, even if they had since been downgraded to high yield, as long as they remain in the BB category.

Since the announcement, credit spreads have improved (declined) and the primary market has opened to companies seeking funds to withstand the coming months, and possibly years, of uncertainty. The Fed’s announcement proved to be so reassuring for the markets that the months of March and April – even before the Fed had purchased a bond – set records for the highest level of new issuance in the investment grade market’s history.1 Nevertheless, the Invesco Fixed Income team expected the transition by the Fed from a verbal commitment to actual buying activity would be critical in the event of another selloff.

On May 12, the long-awaited acquisition of corporate bonds began, but instead of purchasing individual bonds, the Fed chose to acquire exchange traded funds (ETFs). Our belief is that the Fed is buying both investment grade and high yield corporate bond ETFs.

We expect larger ETFs to be involved and purchases to be distributed across the market. What matters more, in our view, is the size of purchases, which should become clearer in the coming days and weeks. This clarity should give us an idea of the potential impact of the Fed’s purchases on the market.

Purchasing ETFs rather than individual bonds was probably the quickest and most efficient way to accumulate bonds in a diversified manner. However, we believe the Fed will be prepared to acquire individual bonds, potentially by June. We anticipate the Fed’s purchasing activity to provide liquidity to the credit markets and be supportive of both investment grade and high yield bonds.



More from Michael Hyman, Matt Brill and Steven Thomson

Fed to purchase corporate bonds through ETFs
May 26, 2020

Subscribe to the blog

Do you want to subscribe in French?

Subscribe to receive e-mails from Invesco Canada Ltd. about this blog. To unsubscribe, please e-mail or contact us.

1. Source: JP Morgan

† IFI is a unit comprising Invesco Senior Secured Management, Inc. of New York, U.S.; Invesco Advisers, Inc. of Atlanta, U.S.; Invesco Asset Management Ltd. of London, U.K.; and Invesco Canada Ltd. of Toronto, Canada.

Blog Header Image: crbellette / Getty

There are risks involved with investing in ETFs. Please read the prospectus for a complete description of risks relevant to the ETF. Ordinary brokerage commissions apply to purchases and sales of ETF units.

Most Invesco ETFs seek to replicate, before fees and expenses, the performance of the applicable Index, and are not actively managed .This means that the Sub-advisor will not attempt to take defensive positions in declining markets and the ETF will continue to provide exposure to each of the securities in the Index regardless of whether the financial condition of one or more issuers of securities in the Index deteriorates .In contrast, if a Invesco ETF is actively managed, then the Sub-advisor has discretion to adjust that Invesco ETF’s holdings in accordance with the ETF’s investment objectives and strategies. ETFs are not diversified investments.

The opinions referenced above are those of the authors as of May 18, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.