Big tobacco, big oil and Buffett join the Fed portfolio

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WASHINGTON (Reuters) – The US Federal Reserve purchased $ 428 million in individual business bonds until mid-June, investing in household names like Walmart and AT&T as well as big oil companies, the giant Tobacco Philip Morris International Inc and a utility subsidiary. from billionaire Warren Buffett’s Berkshire Hathaway holding company.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, United States, March 19, 2019. REUTERS / Leah Millis / File Photo

The transactions disclosed on Sunday are the first purchases of individual corporate bonds by the Fed as part of new programs to support the economy through the coronavirus pandemic. The Fed also added $ 5.3 billion to 16 exchange-traded corporate bond funds, including a sixth newly added high-yield fund.

The first procurement cycle included some 86 issuers, about half of which were contractually settled by June 18 and some were still in progress, all purchased on the secondary market.

It is a small portion of the more than 790 issuers whose bonds, according to the Fed, in a separate release, were eligible for purchase.

But it was still a first foray into corporate bond purchases that have spread across the economy, affecting companies like Gilead Sciences that are involved in developing treatments for the COVID-19 disease caused by the new coronavirus, as well as major car manufacturers. This included Ford Motor Co., whose credit was downgraded to junk after the Fed announced plans to buy corporate debt.

The Bank of Japan and the European Central Bank both have individual corporate bond purchase programs, but the Fed has only added to its arsenal in light of the risks of depression linked to the pandemic. . The goal is to ensure that businesses can continue to finance themselves and not be forced to close due to fundraising problems during a pandemic. The program is supported by US Treasury investment capital to absorb losses in the event of corporate default.

The largest purchases were bonds issued by AT&T and the United Health Group, with the Fed purchasing approximately $ 16.4 million in bonds from each.

Energy issuers accounted for about 8.45% of the bonds purchased, about a percentage point lower than their representation in a broad market index that the Fed says its purchases should follow over time.

Fed bond purchases and other emergency programs will be scrutinized by lawmakers during a Tuesday hearing before the House Financial Services Committee with Fed President Jerome Powell. Questions may relate to individual bonds purchased, but also to the fact that support for the bond markets used by large companies is now operational and receives billions of support from the Fed, while the main street loan program of the Fed for Small Business has not yet made a loan.

Overall, central bank programs have so far been little used. The central bank’s overall balance sheet has declined in the past two weeks, falling to $ 7.08 trillion more recently, as foreign governments have used the Fed’s swap lines less.

Report by Howard Schneider; Editing by Alistair Bell

Our standards:Principles of the Thomson Reuters Trust.

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