The Federal Reserve Board announced yesterday that they will start to wind down their corporate bond and ETF holdings which they purchased last year at the peak of the pandemic.\
“Portfolio sales will be gradual and orderly, and aim to minimise the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds”, they said in a statement.\
The market has been awaiting this move and little reaction was seen with investment grade and high yield credit default swaps little changed. The size of the Fed’s Secondary Market Corporate Credit Facility (SMCCF) is rather limited at around $13.7billion, very small in comparison to the size of the market and the Fed stopped buying on the facility at the end of last year. The New York Fed will provide further details before sales begin but it is thought they will start with their ETF holdings and then sell the credit bonds later in the summer aiming to complete the sales by year end.\
However, this does bring into view the $8trillion on the main account in US Treasuries and Mortgage backed bonds; the market will now focus on this with any change to their $120billion a month in asset purchases keenly monitored.\
We all remember the taper tantrum of 2013 when 10 year yields rose by over 120bp on the back of the Fed announcing they were slowly cutting their quantitative easing program following the financial crash. Expectations are that they will act extremely slowly and signal clearly any move so as to avoid a similar situation; we await the Fed meeting on 16th June for, hopefully, further information.