The Fed has been working its magic since March. Record jobless claims and chances of higher bankruptcies led the Fed to announce an investment of “
up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities” on Apr 9.
The U.S. central bankhad launched a crisis-era policy during mid-March and rolled out another set of stimuli on Mar 23, which included an infinite QE or the purchases of Treasury and mortgage securities plus buying of investment-grade corporate bond ETFs (read:
All-Out Fed Support: Buy Highly-Rated Corporate Bond ETFs).
Together, the program that includes buying of investment-grade debt plus speculative-grade debt will take care of as much as
$850 billion in credit. Per analysts, the Fed support is growing with time and the approach is different from what was seen in the 2008 financial crisis. Unlike the 2008-QE that was supposed to support big banks and Wall Street, the Fed’s latest move is aimed at keeping common public and small businesses safe.
The Fed’s Main Street Lending program has been market-friendly as is evident from the Wall Street rally on Apr 9. Against this backdrop, we highlight a few areas that are likely to gain in the coming days due to the Fed’s newest set of the stimulus.
High-Yield Bonds — iShares iBoxx $ High Yield Corporate Bond ETF (— Up 6.6% on Apr 9 HYG Quick Quote HYG - Free Report)
The Fed will expand its bond-buying program to include debt that was investment-grade rated as of Mar 22 but was later downgraded to no lower than BB-, or three levels into high yield. The announcement acted as a cornerstone for the entire high-yield corporate bond industry (see
all high-yield bond ETFs here).
The underlying Markit iBoxx USD Liquid High Yield Index of HYG is a rules-based index consisting of liquid U.S. dollar denominated, high yield corporate bonds for sale in the United States. Communications (24.27%), Non-Cyclical consumer (17.15%) and Consumer Cyclical (14.44%) are the top three sectors. The fund yields 5.66% annually.
Fallen-Angels — VanEck Vectors Fallen Angel High Yield Bond ETF ( — Up 5.1% ANGL Quick Quote ANGL - Free Report)
The Fed had to intervene in the high-yield market as more and more borrowers are slipping into the category of the fallen angels lately, as
pointed out by Wells Fargo Securities. Per VanEck, there was about $70 billion of estimated volume in the fallen angel segment in late March, including Ford, Occidental Petroleum, Delta Airlines and Western Midstream. The investment management firm expects $250-300 billion of additional fallen angels this year, making it the biggest year on record. Fidelity estimated that roughly $215 billion of U.S. debt could miss its investment-grade status this year, with the energy sector at maximum risk. Against this backdrop, Fed’s move has backed ANGL in a big way. The fund’s seven out of top-10 holdings have BB+ ratings. It yields 5.67% annually. Investment-Grade Bonds — SPDR Portfolio Long Term Corporate Bond ETF (— Up 6.7% SPLB Quick Quote SPLB - Free Report)
As high-yield bonds surged, investment-grade bonds had all the more reason to soar higher. The fund follows the Bloomberg Barclays Long U.S. Corporate Index. It is designed to measure the performance of U.S. corporate bonds that have a maturity of greater than or equal to 10 years. It charges 7 bps in fees and yields 3.58% annually.
Mid-Caps — SPDR S&P MidCap 400 ETF (— Up 3.4% MDY Quick Quote MDY - Free Report)
The Fed is now providing
four-year loans to companies employing up to 10,000 workers and with revenues of less than $2.5 billion per year. The Main Street Lending Program will “ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans.” The terms of those loans will also allow principal and interest payments to be delayed for a year. Loan sizes will range from $1 million to $150 million. Business Development Companies — VanEck Vectors BDC Income ETF (— Up 9.9% BIZD Quick Quote BIZD - Free Report)
A business development company, or BDC, is a closed-end investment company
that helps small companies meet their capital needs and grow. Such companies are known for high yields. Naturally, the Fed’s efforts to save small-cap companies benefited the segment. BIZD yields about 14.02% annually. Real Estate — Pacer Benchmark Retail Real Estate SCTR ETF (— Up 8.8% RTL Quick Quote RTL - Free Report)
Real estate stocks have suffered lately on a torrent of
missed rent payments caused by the steep rise in unemployment and shop closure in America. However, the Fed’s effort to save Main Street should result in a recovery in rents and give some respite to real estate stocks. Plus, RTL’s high annual yield is about 7%. Want key ETF info delivered straight to your inbox?
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