U.S. Federal Reserve announced that it has bought $429 million of individual bonds of 86 corporations—some of them the biggest corporations in the world—as part of its ongoing effort, dating back to mid-September of last year, to bail out, through quantitative easing, the bankrupt world speculative system.
The Fed deployed its “Secondary Market Corporate Debt Facility,” part of its $750 billion Corporate Credit Facility, created earlier this year, to buy the bonds of AT&T, and Comcast, and presented a list of 800 corporations whose bonds it has bought or will buy in the coming weeks: Nike, Apple, Microsoft, Walmart, Exxon-Mobil, Paypal, Target, Fox Media Corp, Toyota Motors, Ford Motors, Volkswagen. Some of these are the largest corporations in the world, and presumably solvent; why is the Fed buying their bonds? There appear to be three reasons:
First, to bail out the $9-10 trillion corporate bond market, which has a significant degree of insolvency, with the downgrading to junk status of an increasing number of companies that had considerable problems before the COVID-19 crisis. When the Fed gave a whiff of the possibility that it might buy corporate bonds in March of this year, investors purchased $1 trillion of new corporate bonds in the first half of 2020, predominantly in the second quarter, and including $160 billion of outright junk bonds. Bankrupt companies like Macy’s could now sell bonds, and Boeing, which was hit very hard by the problems of its 737 Max aircraft and the airline industry’s downturn, suddenly floated a huge $25 billion bond offering.
Second, it was intended to offset the growing wave of bankruptcies. U.S businesses recorded 722 business Chapter 11 bankruptcies in April, and 487 such bankruptcies in May. The Fed is not particularly concerned about the bankruptcy of smaller businesses, except as that may affect the insolvent “credit markets.” But it wanted to ensure that larger companies that are in bankruptcy — JCPenney, J Crew, Diamond Offshore Drilling, Whiting Petroleum — or near bankruptcy — such as Ford Motor Company — not fail, and pull down the corporate bond market.
