Fed buys more bonds but may soon end purchases

WASHINGTON (AP) – The United States (US) Federal Reserve said on Friday that it purchased USD1.3 billion in corporate bonds in late June as part of its effort to keep US 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 USD1.8 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 USD8 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 programme’s original cap of USD750 billion. The Treasury Department has provided USD75 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 on Wednesday.

The seal of the Board of Governors of the United States (US) Federal Reserve System is displayed in the ground at the Marriner S Eccles Federal Reserve Board Building in Washington. PHOTO: AP