Fed now buying corporate-bond ETFs

ProcureAM President Bob Tull joins Yahoo Finance's Seana Smith to discuss the Fed’s decision to begin buying corporate-bond ETFs.

Video Transcript

SEANA SMITH: Well, it's now time for our "ETF Report," brought to you by Invesco. US corporate-bond ETFs getting a boost this week. This comes after the Fed began buying the securities as part of its efforts to support the functioning of credit markets. This comes amid the coronavirus outbreak. So for more on this, we have Bob Tull, president of Procure Holdings.

And Bob, let me just get your thoughts on the Fed's decision to do this. I mean, it is unprecedented. We've seen a little bit of an uptick of flows into corporate-bond ETFs. Is this helping to soothe the market?

BOB TULL: Well, I think to to answer that question, you've got to look back a little bit into early March when corporate bond prices were really cratering. And then when the Fed came out on March 23, you saw a significant rally in both the prices and the activities, the creation levels, the asset growth.

And what's happened is now you saw it in both the corporate side, and you also saw it on the high-yield side. When the Fed finally sort of identified what they were going to focus on, relative to purchasing in the ETF market, it was those ETFs that reflected five years or less of maturity and also had investment-grade bonds in them.

So when you look at that, you might say, OK, it's a double beat plus, and maybe we're going to stop there. So the Fed's been very instrumental in looking at the components of the ETFs, using, if you will, some of the resources within the industry.

And then the other sort of, I thought, significant piece, is that they were not going to purchase bonds where they exceeded 1% of the standard deviation. And now, that doesn't sound like much. But if you look at the rally that we've had since March 23, a lot of the bonds are over that already. So the Fed would have to exclude them from their purchases and, you know, look to alternatives, more likely going into the high-yield side.

Yesterday, I think the rally in the corporate bonds investment grade, those ETFs went up 1% or so, which they haven't done for quite a while. And then you had the overdone space, if you will, in the high-yield, which sort of declined throughout the day. So I think you're going to have to be looking at those dynamics.

SEANA SMITH: Yeah, and Bob, going off of that, I guess how big of an impact do you think the ETF purchase program is going to have an overall markets? And I ask this because the thought that the bond market, kind of goes with what you were saying, has already priced in a lot of the expectations surrounding the Fed's rescue package. I mean, just taking a look at the spreads, we've seen the spreads narrow a little bit over the last couple of weeks.

BOB TULL: Right. And I think if you look at sort of-- let's take a look at some of the drivers, right? One of the things that-- by buying the ETFs, the Fed is putting a price or value on the underlying bonds of that ETF, right? For the entire market. So you can do that with several hundred bonds all at once with an ETF purchase that you can't do, right? Because of the scale of just doing that transaction. You couldn't do otherwise.

SEANA SMITH: And Bob, which corporate-bond ETFs do you think stand to benefit the most from the Fed's intervention?

BOB TULL: Well, I would think that the big three, if you will-- you see BlackRock was very instrumental in writing the paper with the New York Fed of what they were going to do, the plan, if you will. So I expect the BlackRock iShare brand to do well. I expect the Invesco bonds to do well. I expect the Vanguard and the State Street.

How it affects all of the other issuers in the bond market is going to be very questionable. First of all, they may not have the size within the-- the assets within the fund, right? For the Fed to really come in and act on them because they would be collecting too much of a percentage of that ETF.

SEANA SMITH: Bob Tull, president of Procure Holdings, thanks so much for taking the time to join us.

BOB TULL: OK, thank you.