The Federal Reserve has released an update to its Secondary Market Corporate Credit Facility (SMCCF). The Fed has indicated that it will begin buying corporate bonds directly in an effort to support more liquidity and additional credit for large employers. The Fed’s lending program has $250 billion for outstanding corporate bonds and another effort that can buy up to $500 billion of newly issued debt.

According to the Fed’s revised term sheet and updated questions, corporate bond purchases use an indexing approach to buy corporate bonds in the secondary market from US corporate issuers. Bonds must meet or exceed the facility’s minimum rating, as well as a maximum maturity and meet other criteria.

Also according to the Fed, its indexing approach complements the facility’s current exchange-traded fund (ETF) purchases. The Fed’s purchases of US-listed ETFs provided broad exposure to investment-grade US corporate bonds and exposure to US-issued high-yield corporate bonds.

The Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility were established with $75 billion in equity provided by the Treasury Department under the CARES Act. According to New York Fed Frequently Asked Questions, the $75 billion shown here generates a combined facility size of up to $750 billion due to Treasury equity leverage of 10 to 1 when acquiring corporate bonds or syndicated loans from what are deemed to be “eligible issuers” that are rated investment grade (BBB-/Baa3 or higher) at the time the Fed makes the purchases .

This also plays into the Fed’s role of buying junk bonds. Junk bonds eligible for purchase include corporate bond issues of companies rated investment grade as of March 22, 2020 and which remain rated at least BB-/Ba3 at the time of purchase.

Although leverage is used here, Treasury equity is 7 to 1 rather than 10 to 1 when the Fed acquires corporate bonds or syndicated loans rated below investment grade at the time of purchase.

To make things even more complicated, the Fed’s limit on a single issuer is that they have a 10% cap on purchases of the total outstanding debt/loan from a single issuer and the Total issuance is 1.5% of the $750 billion.

There’s a lot more to say about this, but the Fed’s action has been credited with sending another big day into positive territory. As of 3:40 a.m. EST, the Dow Jones was down just 30 points (0.12%) and the S&P 500 was up 10 points (0.3%).