Fed updates Secondary Market Corporate Credit Facility, set to purchase corporate bonds through September

Updates to its Secondary Market Corporate Credit Facility (SMCCF), established in March to support credit to employers  by providing liquidity to the market for outstanding corporate bonds, were announced Monday by the Federal Reserve Board.

The Fed said the SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. “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,” it said. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

Both the Primary Market and Secondary Market Corporate Credit Facilities were established with the approval of the Treasury secretary and with $75 billion in equity provided by Treasury from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The two facilities are among many tools deployed by the Fed to help limit the financial impacts of the coronavirus (COVID-19) pandemic.

Of the initial $75 billion in equity for the two facilities, $25 billion is allocated to the SMCCF, the term sheet notes; the combined size of the SMCCF and PMCCF will be up to $750 billion. The SMCCF will purchase eligible individual corporate bonds and eligible broad market index bonds at fair market value in the secondary market. It will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio, it states.

The term sheet notes that the facility will cease purchasing eligible individual corporate bonds, eligible broad market index bonds, and eligible ETFs no later than Sept. 30, 2020, unless the Fed and Treasury decide to extend it.

Federal Reserve Board announces updates to Secondary Market Corporate Credit Facility (SMCCF), which will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers

SMCCF term sheet (June 15, 2020)