US Fed Sells Corporate Bonds and ETFs... Some See It as a 'Tapering Signal' (Update)

Decision to Sell Corporate Bonds Purchased for COVID-19 Response

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), announced that it will sell corporate bonds and exchange-traded funds (ETFs) purchased during the COVID-19 crisis. Although the Fed denied it, analysts suggest that this move effectively signals the start of tightening ahead of the tapering of asset purchases.

On the 2nd (local time), after the New York stock market closed, the Fed announced through a notice that it will sell all corporate bonds and ETFs purchased last year through the Secondary Market Corporate Credit Facility (SMCCF) by the end of this year. The Fed stopped purchasing corporate bonds through the SMCCF at the end of last year and is now moving to sell the corporate bonds it holds. The Wall Street Journal reported that the Fed holds about $13.7 billion worth of corporate bonds and ETFs.

To support the real economy, the Fed decided in March last year to purchase corporate bonds in addition to monthly purchases of $120 billion in Treasury securities and mortgage-backed securities. The Treasury Department supported the funds for bond purchases under the SMCCF. This was the first time the Fed purchased corporate bonds, seen as a strong signal that it would not stand by and watch the market collapse.

The Fed maintains that this sale decision is not tapering. A Fed spokesperson told Bloomberg News, "This is a measure unrelated to monetary policy and is not a signal of tapering."

Despite the Fed's denial, concerns are growing that the rapid recovery of the U.S. economy will accelerate the timing of tapering.

The economic outlook report "Beige Book" released by the Fed on the same day stated, "The economy expanded at a somewhat faster pace over the past two months compared to the previous report's survey period." It also noted, "Overall price pressures have increased compared to the last report." The Beige Book serves as a basis for the Federal Open Market Committee (FOMC) regular meeting scheduled for the 15th-16th.

If the employment data for May, to be released on the 4th, exceeds expectations, the possibility of tapering may increase further. Market experts estimate that May employment increased by 650,000.