Great tobacco, great oil and Buffett join the Fed portfolio

WASHINGTON (Reuters) – The United States Federal Reserve bought $ 428 million in bonds from individual companies through mid-June, making investments in names known as Walmart and AT&T, as well as in major oil companies, tobacco giant Philip Morris. International Inc and a utility subsidiary of billionaire holding Warren Buffett’s Berkshire Hathaway.

FILE PHOTO: The Federal Reserve Board Building on Constitution Avenue is pictured in Washington, USA, on March 19, 2019. REUTERS / Leah Millis / File Photo

The transactions disclosed Sunday are the first bond purchases by individual companies made by the Federal Reserve under new programs established to fuel the economy through the coronavirus pandemic. The Fed also added $ 5.3 billion in 16 corporate bond traded funds, including a recently added sixth high-yield fund.

The initial round of purchases included some 86 issuers, about half of them contractually liquidated as of June 18 and some still ongoing, all purchased on the secondary market.

That’s a small portion of the more than 790 issuers whose bonds the Fed has said in a separate statement were eligible for purchase.

But it was still a first foray into buying corporate bonds that spread widely throughout the economy, affecting companies like Gilead Sciences that are involved in developing treatments for the COVID-19 disease caused by the new coronavirus, as well as major automakers. That included Ford Motor Co., whose credit was downgraded after the Fed announced its intention to buy corporate debt.

Both the Bank of Japan and the European Central Bank have programs to buy individual corporate bonds, but the Fed only added that to its arsenal in light of the depression-level risks posed by the pandemic. The goal is to ensure that companies can continue to finance themselves and not be forced to leave the business due to problems raising cash during a pandemic. The program is backed by investment capital from the United States Treasury to absorb any losses in the event of corporate default.

The biggest purchases were from bonds issued by AT&T and United Health Group, and the Fed bought about $ 16.4 million in bonds from each.

Issuers in the energy industry accounted for approximately 8.45% of the bonds purchased, approximately one percentage point less than their representation in a broad market index that the Fed says their purchases are intended to track over time.

Lawmakers will review Fed bond purchases and other emergency programs in a hearing Tuesday before the House of Representatives Financial Services committee with Fed Chairman Jerome Powell. Questions may focus on the individual bonds purchased, but also on the fact that support for the bond markets used by major companies is now operational and receiving billions of support from the Fed, while the Loan Program The Fed’s main street for smaller businesses has yet to get a loan.

In general, central bank programs have had modest use. The central bank’s balance sheet has declined over the past two weeks, falling to $ 7.08 trillion more recently as foreign governments made less use of the Fed’s dollar exchange lines.

Report by Howard Schneider; Editing by Alistair Bell

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