The Federal Reserve announced plans to make purchases further down the credit spectrum causing high yield ETFs to see their biggest jump in a decade.

The announcement, which came on Thursday (9 April), said the central bank will expand its ETF buying programme to credit that has recently been downgraded to junk.

The Fed said in a statement: “The preponderance of ETF holdings will be of ETFs whose primary investment objective is exposure to US investment-grade corporate bonds, and the remainder will be in ETFs whose primary investment objective is exposure to US high-yield corporate bonds.

“An issuer that was rated at least BBB-/Baa3 as of March 22, 2020, but was subsequently downgraded, must be rated at least BB-/Ba3 as of the date on which the facility makes a purchase.”

Fed’s decision to buy ETFs throws up questions for the industry

On the news, the $3.6bn iShares USD High Yield Corporate Bond UCITS ETF (IHYU), one of Europe’s largest high yield ETFs, soared 7.8%.

Meanwhile, in the US, the $14.8bn iShares iBoxx High Yield Corporate Bond ETF (HYG), jumped 7.5%, the biggest rise since January 2009.

The announcement comes three weeks after the US central bank revealed plans to purchase ETFs for the first time in its history amid an "unlimited" quantitative easing package to support the global economy following the rapid spread of coronavirus.

The world's largest asset manager, BlackRock, has been selected to manage the purchases, however, will rebate any fees it receives from purchases of its own ETFs.

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