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Big tobacco, big oil and Buffett join the Fed portfolio

WASHINGTON (Reuters) – The US Federal Reserve purchased $ 428 million in individual company bonds until mid-June, making investments in household names such as Walmart and AT&T, as well as major oil companies, the tobacco giant Philip Morris International Inc and a public services subsidiary of billionaire Warren Buffett’s Berkshire Hathaway holding.

FILE PHOTOS: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, United States, on March 19, 2019. REUTERS / Leah Millis / File Photo

The transactions disclosed Sunday are the first purchases of individual bonds made by the Fed as part of new programs set up to feed the economy through the coronavirus pandemic. The Fed also added $ 5.3 billion to 16 corporate bond exchange funds, including a recently added sixth high yield fund.

The initial purchase cycle included approximately 86 issuers, of which about half contracted since 18 June and some still in progress, all purchased on the secondary market.

This is a small portion of the over 790 issuers whose bonds the Fed stated in a separate release were eligible for purchase.

But it was still a first foray into corporate bond purchases that spread widely throughout the economy, touching companies such as Gilead Sciences that are involved in developing treatments for COVID-19 disease caused by the new coronavirus, as well as major manufacturers of Automobiles. This included Ford Motor Co., whose credit was downgraded to junk status after the Fed announced plans to purchase corporate debt.

Both the Bank of Japan and the European Central Bank have plans to purchase individual corporate bonds, but the Fed added this 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 money collection problems during a pandemic. The program is supported by US Treasury investment capital to absorb any losses in the event of corporate default.

The largest purchases were from bonds issued by AT&T and United Health Group, with the Fed purchasing approximately $ 16.4 million of bonds from each.

Energy sector issuers represented around 8.45% of the bonds purchased, about one percentage point lower than their representation in a large market index that the Fed says that its purchases should follow over time.

Fed bond purchases and other contingency plans will be examined by lawmakers in a hearing on Tuesday before the House Financial Services Committee with Fed Chairman Jerome Powell. Questions may focus on individual bonds purchased, but also on the fact that support for bond markets used by major corporations is now up and running and getting billions of Fed support, while the Fed’s corporate highway lending program smaller has yet to make a loan.

Central bank programs have so far seen modest use. The overall central bank balance sheet has declined in the past two weeks, dropping to $ 7.08 trillion more recently, as foreign governments have made less use of the Fed’s dollar swap lines.

Reporting by Howard Schneider; Editing by Alistair Bell

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