The Federal Reserve started buying corporate bonds Tuesday as part of a $250 billion program funded by the CARES Act, which was approved back in March. The idea is to backstop corporations and their employees.
When a company wants to borrow money, it can issue bonds. The buyers of those bonds are lending those companies money. Now the Fed is going to buy a broad cross-section of corporate bonds, if they meet certain standards. They must have been rated investment grade — that is, less risky — as of March, before the coronavirus lockdowns started.
“The Fed is trying to be helpful because they are really uncertain about what’s going to happen later this year,” said Christopher Whalen, chairman of Whalen Global Advisors.
Whalen said the Fed wants to be sure companies have all the money they need to weather the pandemic. The Fed is also making this program anonymous — just buying up corporate bonds without anybody asking it to. That avoids any stigma from companies requesting Fed help.
“There’s always a concern that if you’re looking to the Federal Reserve as opposed to the market for financing, that you might be revealing something about how desperate you are for financing,” said Kathryn Judge, a Columbia University law professor.
The thinking is that if companies have all the financing they need at reasonable rates with the Fed buying their bonds, they won’t need to lay off more workers.
“The purpose is to help these companies remain good employers in the marketplace, stand on their feet, not lay people off and hopefully bring people back into the workforce,” said Frank Nothaft, chief economist at CoreLogic.
And if a company isn’t able to stay on its feet and defaults on the bonds the Fed bought, Chairman Jay Powell can turn to an emergency fund set up by the Treasury Department to backstop the Fed.
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