{"id":2200,"date":"2020-03-23T07:40:42","date_gmt":"2020-03-23T07:40:42","guid":{"rendered":"http:\/\/www.maxlee.info\/blog\/?p=2200"},"modified":"2020-03-24T07:56:37","modified_gmt":"2020-03-24T07:56:37","slug":"the-fed-is-going-to-buy-etfs-what-does-it-mean","status":"publish","type":"post","link":"https:\/\/www.maxlee.info\/blog\/news\/the-fed-is-going-to-buy-etfs-what-does-it-mean\/","title":{"rendered":"The Fed is going to buy ETFs. What does it mean?"},"content":{"rendered":"

The central bank is acting as a buyer of last resort and propping up the bond market in the most efficient manner possible.<\/strong><\/p>\n

<\/p>\n

\"The
The Federal Reserve unleased unlimited QE on Monday and said it would accomplish some of its goals by buying exchange-traded funds.<\/figcaption><\/figure>\n

Published: March 23, 2020 at 3:37 p.m. ET, By Andrea Riquier<\/p>\n

The Federal Reserve on Monday announced a fresh round of stimulus<\/a> designed to calm markets and buffer the hit to the economy from the coronavirus pandemic. Among other steps, the Fed said it would buy exchange-traded funds that track the corporate bond market, a first for the U.S. central bank.<\/p>\n

\u201cThis will provide much-needed liquidity to the bond market and to ETFs,\u201d said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.<\/p>\n

Financial markets have been pummeled over the past few weeks. The global oil market has been collapsing just as a virulent pandemic sweeps the world, sapping resources and shutting down economies. Investors across all kinds of markets are racing to \u201csell everything<\/a>.\u201d<\/p>\n

But the dysfunction may be particularly acute in the market for more highly rated corporate bonds, which aren\u2019t as risky as \u201chigh-yield,\u201d or junk-rated<\/a>, bonds. Investors aren\u2019t used to contemplating such a massive wave of defaults and bankruptcies as the one that might be upon us as companies from cruise ship operators to oil pipeline operators face near zero cash flow.<\/p>\n

\u201cAll of this is to make sure that people who want to sell have a buyer,\u201d explained Steve Blitz, chief U.S. economist for TS Lombard. \u201cThe Fed is taking both sides of the market so people who need to raise cash can do so.\u201d<\/p>\n

In large part, the Fed is using ETFs to accomplish this goal because it\u2019s harder to buy individual bonds than stock positions. \u201cETFs offer the benefits of impacting thousands of bonds in one trade<\/a>,\u201d Rosenbluth told MarketWatch.<\/p>\n

As a second step, Rosenbluth and others think the Fed\u2019s tiptoe may help calm parts of the ETF ecosphere, which has been rattled by record outflows, not just the bond market. For one example, as previously reported, the big investment-grade corporate-bond fund iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, closed on one particularly volatile day about 5% lower than the stated value of its holdings. That means anyone who tried to sell LQD on Thursday received about 95% of what they might have expected. A powerful market stabilizer like the central bank may help buffer strains like those.<\/p>\n

On Monday, after the Fed\u2019s announcement, LQD had gained about 6% and a competitor, Vanguard’s Intermediate-Term Corporate Bond Fund VCIT, was about 5% higher.<\/p>\n

But Dave Nadig, chief investment officer and research director for ETF Flows, noted in a blog post Monday morning<\/a> that the Fed\u2019s purchases won\u2019t help withthe challenges facing bond ETFs right now<\/a>. ETF issuers rely on third-party bond pricing services to help them determine pricing for bonds, which don\u2019t trade frequently under normal circumstances, let alone in a crisis. Those services, often seen as imperfect despite being the best option available, help inform the price of the fund itself.<\/p>\n

In the current trading environment, Rosenbluth told MarketWatch, \u201cthis is a bad environment for trading execution because things are happening so fast that it\u2019s hard to assess fair value.\u201d<\/p>\n

Expectations of climbing corporate defaults are adding to the strain. On Friday, the U.S. junk-bond market\u2019s main benchmark, the ICE BofA U.S. High Yield Index, ended the day\u2019s session in distressed territory at 1,009 basis points over Treasurys, according to Marty Fridson, chief investment officer at Lehmann, Livian, Fridson Advisors.<\/p>\n

Meanwhile, Goldman Sachs analysts on Friday said they anticipate high-yield defaults to spike to 13% by year-end, even with the Federal Reserve\u2019s revival of crisis-era facilities to pump liquidity into financial markets.<\/p>\n

They also pointed out that bond-fund outflows have been driven by ETFs and expect the corporate bond market to remain challenging, \u201cwhich may result in persistent ETF outflows in the near term.\u201d<\/p>\n

Of note, the Fed last week excluded ETFs<\/a> and other types of assets from being used as collateral when it rolled out a new Primary Dealer Credit Facility to arm key dealers of securities on Wall Street with low-cost loans to jump-start trading again and to boost liquidity.<\/p>\n

Still, many observers are applauding the Fed\u2019s commitment to doing what it can to assuage the battering of the financial markets. \u201cWhile Congress fiddles, Fed continues to get it done,\u201d wrote Chris Low, chief economist for FHN Financial, on Monday morning after the Fed\u2019s announcement.<\/p>\n

More to the point, as Blitz notes, \u201cHow we got here is ten years of successive liquidity pumped into the market, forcing money into risk assets, building up the economy through financial asset inflation because the real side of the economy didn\u2019t come along to the same extent. The Fed created this monster so it has to be on the other side of it now.\u201d<\/p>\n

Read: Here\u2019s a breakdown of the Fed\u2019s rescue programs to keep credit flowing during the pandemic<\/a><\/p>\n

Source: www.marketwatch.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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