The Fed is among the biggest winners in its advance in credit ETFs


    (Bloomberg) – Avoiding the collapse of the financial system brought an added bonus for the Federal Reserve: a decent profit.

    The Federal Reserve raised approximately $ 8.6 billion worth of exchange-traded bond funds in 2020 to prop up markets amid a rapidly waning pandemic. Now that the Fed is preparing to liquidate its holdings on June 7, it has a profit of $ 140 million from the price increase alone, according to Citigroup Inc.

    After intervening in an effectively frozen corporate bond market last year, the Fed drove a massive rally across the credit spectrum amid a spate of inflows. Since then, high yield bonds have provided the largest returns for the central bank’s secondary market corporate credit facility.

    “It’s worth noting that the Fed currently has a paper profit in its ETF portfolio,” Citigroup analyst Drew Pettit and Scott Chronert wrote in a note on Thursday. “The Fed could act faster on certain holdings here in order to secure profits.”

    The Fed’s purchases focused on the iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) valued at $ 40 billion, respectively. The central bank now owns around $ 576 million in the $ 10.5 billion SPDR Bloomberg Barclays High Yield Bond ETF (ticker JNK).

    Although the Fed only started buying ETFs last May, credit markets rebounded massively from the central bank’s first announcement in late March. The LQD rose 8% in 2020 after falling almost 18% over the year before the Fed backstop. JNK ended 2020 about 0.6% lower, despite gaining over 14% since the central bank announced it would extend its support to the high-yield market through the end of the year.

    Top performers may have outperformed the Fed itself. LQD and JNK combined added $ 12.5 billion in the weeks between the Fed’s announcement and the central bank’s first ETF purchases. The two funds gained 19% and 2.8% respectively over the period.


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