Will its slow withdrawal of a huge credit backstop rattle markets?
It’s not exactly tapering, but the US Federal Reserve is starting the clock on withdrawing the emergency measures it deployed to support financial markets [after the covid pandemic broke out]. The central bank said late Wednesday that it would start gradually selling the $13.7 billion portfolio of US corporate debt and exchange-traded funds it amassed through its secondary market corporate credit facility, which was created during the worst of the pandemic-inspired market meltdown in March 2020. The facility marked an unprecedented intervention for the US Fed because it effectively pledged to plough hundreds of billions of dollars into company debt if no one else would. That backstop, even if it wasn’t fully used, quickly restored investor confidence, led to a ferocious rally in practically every corner of the bond market, and encouraged record-breaking amounts of debt sales from investment-grade and high-yield borrowers alike.
In fact, this one modest-sized facility, perhaps more than any other from the Fed, has most likely changed financial markets forever [at least in the West].