U.S. Markets

Fed will begin purchasing corporate bonds on Tuesday

FILE PHOTO: The Federal Reserve seal is seen during Chairman Jerome Powell news conference following the two-day meeting of the Federal Open Market Committee (FOMC) meeting on interest rate policy in Washington, U.S., January 29, 2020. REUTERS/Yuri Gripas

(Reuters) - The Federal Reserve said it will start purchasing corporate bonds on Tuesday through the secondary market corporate credit facility (SMCCF), one of several emergency facilities recently launched by the U.S. central bank to improve market functioning in the wake of the coronavirus pandemic.

The Fed will use an indexing approach when making purchases, aiming to create a portfolio that is based on a broad, diversified market index of U.S. corporate bonds.

The purchases will complement the other asset purchases made by the SMCCF, which began buying shares of broad-based exchange-traded funds in mid-May.

Stock markets rose on the announcement on Monday afternoon after the news boosted investor confidence.

The corporate bond purchases will be based on an index that is “made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria,” the Fed said on Monday.

The Fed’s Primary Market Corporate Credit Facility, which will buy corporate bonds directly from eligible issuers, should become “operational in the near future,” the central bank said on Monday.

Reporting by Jonnelle Marte and Lindsay Dunsmuir; editing by Franklin Paul and Jonathan Oatis