Fed slowing bond purchases

The Federal Reserve said Friday that it purchased US$1.3 billion in corporate bonds in late June as part of its effort to keep U.S. interest rates low and ensure large companies can borrow by selling bonds.

The Fed bought bonds issued by several hundred large companies, including AT&T, PepsiCo, and Berkshire Hathaway, the conglomerate controlled by billionaire Warren Buffett. Combined with purchases from earlier in the month, the Fed has bought nearly US$1.8 billion in corporate debt.

The purchases are intended to keep interest rates on corporate bonds from spiking, which would make it harder for companies to borrow by selling debt. The Fed’s announcement in March that it would, for the first time, purchase corporate debt quickly boosted trading in corporate bonds and brought down interest rates in that market.

The Fed is buying bonds from a wide range of companies to mimic a broad market index, in order to avoid favouring any specific industry. Last month, it bought bonds issued by UPS, Home Depot, oil and gas pipeline company Kinder Morgan, and drugstore chain CVS.

The Fed has also purchased nearly US$8 billion in pools of bonds held in exchange-traded funds, which operate similarly to mutual funds.

A Fed official said this week that the central bank has slowed its bond buying in recent weeks and may continue to do so if the market remains relatively healthy. The Fed’s purchases remain well short of the program’s original cap of $750 billion. The Treasury Department has provided $75 billion in taxpayer funds to offset any losses.

“If market conditions continue to improve, Fed purchases could slow further, potentially reaching very low levels or stopping entirely,” Daleep Singh, executive vice-president of the New York Federal Reserve said Wednesday.

“This would not be a signal that the [bond purchase program’s] doors were closed, but rather that markets are functioning well,” Singh added.

Christopher Rugaber, The Associated Press

Christopher Rugaber is a reporter with The Associated Press,  an American not-for-profit news agency headquartered in New York City and founded in 1846.