WASHINGTON -- The Federal Reserve on Sunday released a list of roughly 750 companies, including Apple, Walmart, Exxon Mobil, Verizon, Comcast and U.S. divisions of Toyota, Volkswagen, Daimler and BMW, whose corporate bonds it will purchase in the coming months in an effort to keep borrowing costs low and smooth the flow of credit.
The central bank also said it has, so far, purchased nearly $429 million in corporate bonds from 86 of those companies, including AT&T, Walgreen's, Microsoft, Pfizer and Marathon Petroleum.
The Fed announced in March that it would, for the first time in its history, purchase corporate bonds as the intensifying viral outbreak caused panicked investors to dump most types of securities in a rush to hold cash. That pushed up a range of interest rates and made it nearly impossible for companies to borrow more by issuing new bonds.
Yet once the Fed said it intended to purchase up to $750 billion of corporate debt, investors began buying bonds again and eventually large companies resumed issuing large amounts of new bonds. Recent economic research has found that simply by announcing the program, the Fed was able to boost confidence in corporate bonds and improve the market's efficiency.
Fed Chairman Jerome Powell has said that by ensuring large companies can borrow more, the Fed is seeking to keep those firms from having to layoff workers. But the corporations aren't required to keep all their workers.
At a hearing last week, Sen. Pat Toomey, R-Pa., questioned Powell about whether the purchases were still necessary, since the corporate bond market has largely recovered. Powell said the Fed had to follow through on its promises.
CASTING NET WIDE
To avoid criticism that it might favor a specific industry, the Fed said two weeks ago that it would seek to mimic a broad market index approach and purchase bonds from a wide range of companies. Consumer product companies, such as Quaker Oats and the distiller Brown-Forman, which makes Jack Daniel's and Woodford Reserve whiskeys, make up roughly a third of the index. That sector is followed by utilities at 10% and energy firms at more than 9%. The index also includes insurance companies but no banks.
The Fed will buy only highly rated debt from financially healthy companies, or ones that were highly rated before the pandemic struck. The Fed is legally barred from lending to insolvent companies. It has said it would report on its purchases every 30 days.
The Fed said Sunday that it made its first bond buys from 86 companies last week. Those companies include Nike, broadcaster Fox Corp., Paypal, Target, Campbell Soup and chipmaker Broadcom.
The central bank is also purchasing pools of bonds in exchange-traded funds, which operate similarly to mutual funds. The Fed currently owns $6.8 billion of bond exchange-traded funds.
The Treasury Department has provided $75 billion in taxpayer money to backstop any losses from the bond buys. So far, the Fed's purchases remain modest relative to the program's announced $750 billion cap.
By comparison, since March it has purchased more than $2 trillion in Treasurys and mortgage-backed securities in an effort to pump cash into short-term lending markets.
William Slaughter, senior portfolio manager at Northwest Passage Capital Advisors, tweeted that "it is exceedingly hard to fathom what public interest the Fed is serving by buying bonds" of Apple, Microsoft and Oracle. Pointing to the foreign automakers that came in near the top of the index, Slaughter asked, "should the Fed really make it easier to lease your next Porsche?" (The luxury car company is owned by Volkswagen.)
The Fed's corporate credit facilities are twofold: the "primary market" facility, which launched Monday, allows the Fed to purchase bonds directly issued by large companies that apply for certification. The "secondary market" facility purchases already-issued bonds that fall within the index and are trading in the secondary market. The Fed has said that even as the markets have healed significantly since March, the facilities should still be in place in case conditions turn south.
FOREIGN FIRM SUBSIDIARIES
The central bank has said it is within its legal bounds to include American subsidiaries of foreign companies. The central bank has said it is buying a broad set of bonds reflecting a swath of companies that issue in the American bond market, and many foreign-based companies borrow in that market. Foreign investors, particularly those in Asia and Europe, have scooped up U.S. corporate bonds, which has helped bolster credit markets, and the Fed's decision to buy corporate debt will give bondholders assurances about their investments.
Companies can borrow money by issuing bonds, a type of debt. These bonds must be repaid in a certain amount of time, and companies often repay that debt by issuing new debt. If companies can't issue new debt, there could be severe economic consequences.
David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings, said the makeup of the index reflects how globalized the American bond market -- and any particular slice of it -- is today.
"Who is being bailed out here?" Wessel said. "It's certainly not the companies -- the companies already borrowed the money. The people who are getting help are the people who own those bonds."
Information for this article was contributed by Christopher Rugaber of The Associated Press and by Rachel Siegel of The Washington Post.