SINGAPORE (June 18): From 16 June, the US Federal Reserve will commence individual corporate bond purchases under its Secondary Market Corporate Credit Facility (SMCCF). While this move comes in addition to existing exchange-traded funds (ETF) purchases, the Fed has reiterated that this does not constitute an expansion of existing credit facilities. 

Fed chairman Jerome Powell told a Senate Banking Committee that the move will not see the central bank increase the dollar volume of its asset purchases. Rather, he told the committee, the Fed will be diversifying asset acquisition to include individual bonds on top of existing purchases of ETFs. “We’re just shifting away from ETFs to this other form of index,” he said on Tuesday, highlighting the Fed’s intention to create its own representative bond index. 

“We see this as fine-tuning by the Fed, but it could be misconstrued by markets as an expansion of existing credit facilities,” warns DBS Macro Strategist Tan Wei Liang. As bond ETFs do not include all the bonds that the Fed needs to support within their inclusion criteria, the Fed wants to create its own representative index to better include these within its portfolio. An additional purchase of individual corporate bonds is required to build the new index. 

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