Statement: AFR on the Fed’s “Broad Market Index” for the Secondary Market Corporate Credit Facility


June 29, 2020

Carter Dougherty
(202) 251-6700

Statement on Fed Corporate Bond Facility

Over the weekend, the Federal Reserve Bank of New York announced the initial composition of the index they will be using to purchase corporate bonds through its Secondary Market Corporate Credit Facility (SMCCF). The corporations included in their June 5 “Broad Market Index” raise serious concerns about public benefit, solvency, and further incentivizing companies to take on additional debt unnecessarily.

Under the Fed’s criteria, the debt of private equity firms such as Blackstone, Apollo, Carlyle, and Fortress Investment Management as well as hedge funds such as Citadel, all of whom have opted to issue debt over other forms of financing, are eligible to be purchased as a result of their inclusion in the index. In addition, nearly 9.5% of the Fed’s index is in energy sector firms — higher than the 8.3% in the iShares iBoxx Investment Grade Corporate Bond ETF. The Fed will be buying the corporate debt of some companies of questionable solvency, such as Diamondback, which has $3.1 billion in earnings but $5.4 billion in debt, and who the credit ratings agency Moodys has rated as junk since initiating its rating in September 2013. 

Because the Fed doesn’t place conditions on companies who receive this funding, the effect here is not to support employment or wages at these firms, but to effectively bail out owners and debt holders at these companies. Claimed indirect effects on overall bond markets are also unlikely to be of significant public benefit given that, unlike other sectors of the economy, corporate bond markets have fully rebounded from the coronavirus impact.