The Federal Reserve said Monday that it will begin purchasing corporate bonds as part of a previously-announced plan to ensure companies can borrow through the bond market during the pandemic.
The program will purchase existing bonds on the open market, as opposed to newly-issued debt. The central bank said will seek to build a “broad and diversified” portfolio that will mimic a bond-market index. The bonds will have to be from highly-rated, investment-grade companies, or firms that fit that description before the viral outbreak struck.
The announcement boosted the stock market, which was already rebounding from early losses. The Dow Jones rose 0.8% in afternoon trading.
The Fed’s purchases should hold down corporate bond yields, making it cheaper for companies to borrow. But by also lowering the return from investing in those bonds, the Fed’s actions will likely encourage investors to shift money from corporate bonds to stocks in hopes of achieving a higher return.
When the Fed announced its bond-purchase program in March, few companies were able to issue bonds. Banks and other large investors were dumping assets in favor of cash. New research has found that simply by announcing the program, the Fed was able to encourage more bond trading and improve the market’s efficiency.
The Fed has said it will buy up to $750 billion of corporate bonds and exchange-traded funds made up of corporate bonds. The Treasury Department has provided the Fed $75 billion of taxpayer funds to offset any losses that occur from the investments.