For much of the past seven months, the biggest story in capital markets was the Fed’s Blackrock-mediated purchases of corporate bonds, either in the primary or secondary market or via ETFs.
As a reminder, while the Fed pre-announced its intention to purchase up to $750BN in corporate bond (including certain fallen-angel junk bonds) in March, it started purchasing bonds in May, and bond ETFs in June (among which such mainstays as LQD and HYG). By directly entering the corporate bond market – something none of his predecessors dared to do even at the depths of the financial crisis – Powell created what many – us included – said the biggest corporate and junk bond bubble in history, because by backstopping prices the Fed terminally disconnected fundamentals from prices.
And, as expected, bond prices, stocks, and ETFs all surged while yields plunged, even while the underlying cash flow fundamentals deteriorated as everyone was trying to front-run the Fed’s pending or concurrent massive purchases. In other words, by jawboning alone, the Fed accomplished its handiwork.
Yet something odd happened last month: in all of August, when during the peak summer doldrums it was SoftBank’s turn to steal the spotlight with its now infamous gamma meltup, the Fed did not buy a single ETF, and barely bought any corporate bonds, which prompted us to ask: is Powell sending markets a message?
In retrospect it appears he was, because after an early swoon in the first days of September, stocks suffered their first major bout of turbulence since June last month when they closed in the red for the first time since the covid pandemic broke out.
So fast forward to today when the Fed released the latest monthly activity details under its Secondary Market Corporate Credit Facility when we find that for the second month in a row, the Fed bought zero corporate ETFs…
… and logically, the number of ETF shares held was unchanged for the second consecutive month:
Looking at the bond level data showed a similar picture: here the Fed or rather Blackrock was just a bit busier, and bought just $420 million par value of bonds between Aug 31 and Sept 29, after purchasing just $421 million the month prior.
However, unlike August when Blackrock purchased $7 million in Apple bonds across three CUSIPs with maturity dates in 2023, 2024 and 2025.
Why the Fed continues to buy Apple bonds – which are arguably the most liquid corporate bonds in the world – remains a mystery.
In any case, the modest September purchases, the Fed’s total corporate bond holdings rose by $394 million from $3.988 billion to 4.382 billion, an amount which also included the redemptions of several issues. And when combined with its $8.618 billion in ETF holdings, this means that as of August 31, the Fed owned just over $13 billion in bonds and ETFs.
Why is this notable?
Because this $13BN of bond purchases to date is a long way away from the $750BN figure the Fed initially said it was targeting and is far below the bogey the market has in mind. , as Johnson says “is currently in market participants psyche (i.e., 1.8% of what many continue to think the Fed will spend)”.
What are the implications?
The fact that the Fed stopped supporting the corporate bond ETF market during August and then again in September, appears to be a rather stark – if still unspoken – reversal in Fed policy stance, and one which we wish a “financial reporter” had asked Chair Powell to explain why during last month’s FOMC conference.
The key question, as we asked one month ago, “could it be that the Fed is starting to telegraph to the market that it moved too far, too fast? We hope to have the answer one month from today when we will learn if the Fed bought no ETFs for 3 consecutive months, and remember: “Once is happenstance. Twice is coincidence. Three times is enemy action.”