The coronavirus crisis has produced an economic response from the United States government on a scale like never before. Since the COVID-19 outbreak first began in early March, the Federal Reserve has printed over $4 trillion in under three months to help fund several stimulus policies that aim to keep the economy working during the shutdown.
Much of this stimulus money has been directed at supporting the financial markets, which includes purchasing Treasury bonds and mortgage-backed securities and providing funding to businesses and corporations to help keep the economic wheel spinning.
Intervention sans limit
On Monday, May 11, 2020, The Federal Reserve (the Fed) announced that starting Tuesday, May 12, 2020, it would begin purchasing exchange-traded funds (ETFs) -- specifically, ETFs that own corporate bonds. This is a first for the central bank and is a clear sign that the government will do whatever it takes to keep the financial market operating as usual.
ETFs will be purchased through the Secondary Market Corporate Credit Facility (SMCCF) with a focus on ETFs with large exposure to the market from corporate debt, although other factors will be considered as outlined in the management agreement. Intervention in the ETF and corporate bond market will happen in a series of three phases:
- Ongoing monitoring.
- Reduction in support.
Currently, the Fed has allocated $75 billion toward this purchasing of ETFs, having already invested $37.5 billion in ETFs to date. Until stabilization reaching pre-March market levels is achieved, purchasing will be done at a "higher pace," followed by a reduction in purchasing with careful monitoring, later reducing all support by "September 30, 2020, unless the Facility is extended by the Board and the UST."
Investors who hold shares in ETFs will likely see favorable impacts, especially with ETFs that have been directly impacted by this stimulus. While government intervention and the continued stream of new money may help keep things operating as "normal" for now, it doesn't mean business will go back to the way things were for all companies.
It's imperative to do your due diligence on the companies you invest in. Review your current portfolio of ETFs or real estate investment trusts (REITs) carefully, and if you are looking for new investments, choose companies with a strong balance sheet even in the middle of the current crisis.