“It does sort of make you wonder if it makes sense for them to be buying bonds of Apple. Spreads are so tight and stocks are doing so well. You wouldn’t think they would need support from the Fed,” said Kathy Jones, director of fixed income at Charles Schwab. “The reasoning I guess makes sense. But when you look at the outcome, you scratch your head and wonder whether this is where we need the money to go.”

Portfolio trading, powered by the ETF boom, was gaining converts as markets in many individual bonds all but froze. Transactions cleared by Tradeweb Markets Inc.’s electronic platform have doubled from a year ago, reaching a cumulative $90 billion globally last month. That’s already more than in all of 2019, and puts Europe on track to surpass Wall Street’s tally from last year, too.

Initially, the SMCCF was structured to hold two types of investments, “Eligible Individual Corporate Bonds” and “Eligible ETFs”. Yesterday, the Fed introduced a third category: “Eligible Broad Market Index Bonds”. This new category allows the Fed to immediately begin buying individual corporate bonds in much larger volume than previously anticipated.

Corporate treasurers retain the ability to sway conditions in key markets. Their role has taken on a renewed importance given the mass issuance of global government and corporate debt sparked by the pandemic shock. 

These new programs rely on pre-2008 assumptions about market structure. The biggest financial players have a much smaller footprint in the markets than they once did, and the 24 Primary Dealers with whom the Fed currently trades make up a much smaller share of the trading market. The pulse of the financial markets now extends beyond the old Wall Street stalwarts

Carney compared what was happening in the corporate-debt markets to the subprime-mortgage boom that culminated in the great financial crisis of 2008 and 2009. Citing the rise of “covenant lite” loans that placed very few restrictions on corporate borrowers, Carney said, “The subprime analogy isn’t perfect, but it’s on the road to ‘no doc’ underwriting, which happened eleven years ago.”

In this note, we calculate several measures of liquidity to shed light on trading conditions in one large and important market: the market for corporate bonds. As uncertainty surrounding downgrades and potential defaults grew during the first weeks of March, and withdrawals from corporate bond funds mounted, we find that dealers became increasingly unwilling to absorb inventory onto their balance sheets.

List of corporate bond market makers that are eligible to trade with the Secondary Market Corporate Credit Facility. 

What would be interesting to see is the execution of this Fed action be a catalyst to finally drag corporate bond trading out of the “relationship age” and into the “information age.” 

Three main questions around execution have been raised by market participants to The DESK: Who will manage the broker list? How will execution quality be judged? How will conflicts of interest be avoided by BlackRock’s Financial Markets Advisory team, when it might buy assets including BlackRock ETFs, or assets it has a view on for investment purposes?