Stocks climb after Fed details bond-buying plan

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The Federal Reserve said on Monday that it would begin to buy debt issued by individual corporations based on a broad index of corporate bonds in the United States, a new step in the central bank’s efforts to keep credit flowing freely amid the coronavirus pandemic.

Officials voted unanimously to expand the so-called Secondary Market Corporate Credit Facility, which it unveiled in May. The program is meant to allow companies to continue borrowing money at a time of high stress on the financial system following the steep economic decline from the pandemic. Originally, the Fed did

that by purchasing exchange traded funds, which trade like stocks but have broad exposure to corporate bonds.

Under the expansion approved on Monday, which Fed officials had foreshadowed in their creation of the program, the Fed will now “begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers,” officials said in a news release. The purchases, they added, will “create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds.” Fed officials had not previously signaled that the individual corporate bond purchases would follow an index approach.

Even before buying a single bond, the Fed managed to achieve its main goal with its primary and secondary bond-buying programs: restarting the frozen corporate debt market. It first announced that it would set up the programs on March 23, and the mere promise of a backstop revived the market, allowing companies to issue debt to raise needed cash amid the coronavirus economic downturn.

Once they are fully up and running, the Fed’s programs will buy both newly issued debt on the primary market and debt that is already being traded on a secondary market. The programs were expanded on April 9 to include some junk bonds.

A rout on Wall Street turned into a rally on Monday, with stocks crossing into positive territory for the day after the Federal Reserve said it would soon start to buy debt issued by individual companies in a new effort to keep credit flowing.

The S&P 500 ended nearly 1 percent higher after having spent most of the day in negative territory. Though stocks had already recouped the worst of their losses — the index fell as much 2.5 percent earlier — shares jumped after the Fed’s new plan was released.

The Fed’s earlier intervention in financial markets, aimed at smoothing out the functioning of credit markets, was credited by many investors for driving a 45 percent rally in stocks from their March lows. The expansion of its program to include individual companies is meant to ensure businesses have access to funding during the economic downturn.

Source: The New York Times

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