The Federal Reserve’s historic foray into the credit market has benefitted auto companies the most, supporting an industry that’s borrowed its way through the pandemic and is starting to show signs of recovery.
The central bank can only buy shorter-dated debt of companies that mostly employ Americans, making notes linked to car manufacturers prime candidates. The Fed bought another $224 million of debt tied to auto companies since its last update on July 10, the most of any sector.
That debt is now the second-heaviest exposure overall, according to a CreditSights analysis of Fed data released Monday.
Among the Fed’s biggest holdings are the U.S. finance arms of German manufacturers Daimler AG and Volkswagen AG, Japan’s Toyota Motor Co. and Ford Motor Co., strategists led by Jeff Khasin said in a report.
While the Fed’s bond investments aim to replicate the broader credit market, the purchases nonetheless support one of America’s biggest home-grown industries. The sector supports nearly 10 million U.S. jobs, and contributes about 3% to the domestic economy each year, according to lobbying group the Alliance of Automobile Manufacturers.
Outside of financial companies, consumer-cyclical firms, a category that includes car makers, have been the most active issuers of new investment-grade bonds this year, according to data compiled by Bloomberg.
The Fed isn’t buying bonds tied to banks, giving it a limited pool of shorter-dated debt to purchase, according to Bloomberg Intelligence analyst Noel Hebert.
Auto companies make up 5.2% of non-bank investment-grade debt due in five years or less, based on Bloomberg Barclays index data. Most of the bonds are issued by manufacturers’ finance units, which use cheap funds from the corporate credit markets to make loans to consumers.
“There’s the math and then there’s the mission,” said Matt Brill, head of U.S. investment-grade credit at Invesco Ltd. “This is making sure the plumbing works, and then everybody benefits.”
Toyota Motor Credit and Volkswagen Group of America Finance LLC, for example, each make up 1.75% of the Fed’s eligible index of bonds in its secondary market facility. That’s slightly higher than the weight of AT&T Inc., the world’s largest non-financial borrower.
Automakers were initially hit hard by the pandemic when shelter-in-place rules closed U.S. plants in May and June and kept consumers from dealerships. But second-quarter losses were not as steep as expected for many leading automakers, and some like General Motors Co. (GM) expect to turn a profit in the second half of the year.
In the high-yield bond market, auto and energy companies make up 90% of the Fed’s purchases, Citigroup Inc. strategists led by Michael Anderson wrote in a report Monday. Recent fallen angels like Ford (F) are a large beneficiary.
When asked for comment, the New York Fed referred to its purchasing methodology, while BlackRock Inc., the central bank’s investment adviser for the transactions, declined to comment.
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