Fed to purchase corporate bonds through ETFs

The central bank’s actions should support liquidity and pricing for the investment grade and high yield corporate bond markets.

On March 23, the US Federal Reserve (Fed) announced its intent to acquire investment grade corporate bonds. The purpose of the communication was to support a market in which sharp price declines were threatening to disrupt the normal functioning of primary (new issue) and secondary market activities. On April 9, the Fed expanded the definition of bonds eligible for purchase to include those with investment grade ratings as of March 23, even if they had since been downgraded to high yield, as long as they remain in the BB category.

Since the announcement, credit spreads have improved (declined) and the primary market has opened to companies seeking funds to withstand the coming months, and possibly years, of uncertainty. The Fed’s announcement proved to be so reassuring for the markets that the months of March and April – even before the Fed had purchased a bond – set records for the highest level of new issuance in the investment grade market’s history.1 Nevertheless, Invesco Fixed Income expected the transition by the Fed from a verbal commitment to actual buying activity would be critical in the event of another selloff.

On May 12, the long-awaited acquisition of corporate bonds began, but instead of purchasing individual bonds, the Fed chose to acquire exchange traded funds (ETFs). Our belief is that the Fed is buying both investment grade and high yield corporate bond ETFs.

We expect larger ETFs to be involved and purchases to be distributed across the market. What matters more, in our view, is the size of purchases, which should become clearer in the coming days and weeks. This clarity should give us an idea of the potential impact of the Fed’s purchases on the market.

Purchasing ETFs rather than individual bonds was probably the quickest and most efficient way to accumulate bonds in a diversified manner. However, we believe the Fed will be prepared to acquire individual bonds, potentially by June. We anticipate the Fed’s purchasing activity to provide liquidity to the credit markets and be supportive of both investment grade and high yield bonds.

Figure 1: Invesco funds that could be impacted by the Federal Reserve’s bond purchasing program

Percentage of fund assets in the two asset classes where the Fed is purchasing bonds – investment grade (IG) and high yield (HY).

Fund NameIGHYTotal
Invesco Core Plus Bond Fund32.94%8.22%41.16%
Invesco Oppenheimer Total Return Bond Fund38.86%1.9%40.76%
Invesco Short Term Bond Fund45.50%4.11%49.61%
Invesco Corporate Bond Fund69.63%13.79%83.42%
Source: Invesco, As of March 31, 2020. Please see the Invesco website for complete holdings information. Holdings are subject to change.

Footnote

1. Source: JP Morgan

Important information

Blog Header Image: crbellette / Getty

The opinions referenced above are those of the author as of May 18, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Investments focused in a particular industry or sector are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. 

Investors should consult a financial professional before making any decisions. Shares of ETFs are not individually redeemable and owners of the Shares may acquire those Shares from the fund and tender those shares for redemption from the fund in Creation Unit aggregations only, typically consisting of 10,000, 50,000, 75,000, 80,000, 100,000, 150,000, or 200,000 shares.

Credit ratings are assigned by Nationally Recognized Statistical Rating Organizations based on assessment of the credit worthiness of the underlying bond issuers. The ratings range from AAA (highest) to D (lowest) and are subject to change. Not rated indicates the debtor was not rated, and should not be interpreted as indicating low quality. Futures and other derivatives are not eligible for assigned credit ratings by any NRSRO and are excluded from quality allocations. For more information on rating methodologies, please visit the following NRSRO websites: standardandpoors.com and select “Understanding Ratings” under Rating Resources and moodys.com and select “Rating Methodologies” under Research and Ratings.

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses.  For this and more complete information about the fund(s), investors should contact their advisers for a prospectus and/or summary prospectus or visit invesco.com/fundprospectus.

Michael Hyman is Chief Investment Officer, Global Investment Grade & Emerging Markets for Invesco Fixed Income. He joined Invesco in 2013.

Previously, Mr. Hyman was with ING Investment Management and ING Institutional Markets for 12 years. At ING, he was the head of investment grade corporate credit, responsible for investment grade corporate credit as well as collateralized loan obligation and synthetic collateralized debt obligation investment portfolios. Prior to joining ING, Mr. Hyman was a director of capital markets for GE Capital and held trading and risk-management positions at various global banks. He entered the industry in 1991.

Mr. Hyman earned a BSE degree in finance from Pennsylvania State University and an MBA from the Stern School of Business at New York University.

Matt Brill is a Senior Portfolio Manager for Invesco Fixed Income. He is responsible for implementing investment grade credit strategies across the fixed income platform.

Prior to joining Invesco in 2013, Mr. Brill was a portfolio manager and vice president at ING Investment Management, where he specialized in investment grade credit and commercial mortgage-backed securities. Prior to that he was a portfolio analyst at Wells Real Estate Funds. He entered the industry in 2002.

Mr. Brill earned a BA degree in economics at Washington and Lee University. He is a Chartered Financial Analyst® (CFA) charterholder.

Steven Thompson is a Senior Client Portfolio Manager responsible for client-related activities across the fixed income credit spectrum with a primary focus on investment grade and multiasset strategies.

Mr. Thompson entered the industry in 1992 and joined Invesco in 2014. He previously served as a product specialist supporting investment grade, high yield, bank loans and quantitative asset allocation strategies at AEGON. He also worked at Bank of America in the US and Europe as a senior securitization professional covering bank loans, high yield bonds and asset-backed securities. While at Bank of America, he was involved with the buildout of the European cash and derivative collateralized loan obligation platform. Mr. Thompson also worked at Wachovia in a similar role.

Mr. Thompson earned BBA and MA degrees in accounting from the University of Iowa. He holds the Series 7 and 63 registrations.

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