Tucson Opinion: This bond's for you

Historians will surely wonder why the Federal Reserve bought $40 million of tobacco company corporate bonds to combat the coronavirus recession at a time when many coronavirus believers think smoking could contribute to some of those “underlying conditions” that make people more vulnerable to the virus.

It started innocently enough, if you consider government purchases of corporate bonds to be innocent. As he watched our economy derail in March, Treasury Secretary Steve Mnuchin realized “Wonder Woman” was not going to appear and save capitalism, so he authorized a corporate bond-buying program through the Federal Reserve. And don’t worry — if a Republican administration buys corporate bonds, it can’t be socialism.

Mnuchin had moved up the ladder at Goldman Sachs and was a founder and CEO of OneWest Bank among other financial endeavors. He then changed careers to movies. (The following titles in quotations are movies on which he was an executive producer.) He was appointed Treasury secretary after being confirmed in 2017.

Purchasing tobacco company bonds was not a case of “Rules Don’t Apply.” Under the program’s guidelines, bonds had to have been issued by American companies, or by international companies with an American subsidiary that issued bonds in the U.S. This allowed it to buy bonds originally issued by tobacco giants Altria and Phillip Morris . For example on June 23, the Fed purchased three lots of Altria bonds at $2 million for each lot. The three lots had different maturity dates and interest rates. (Warning: there are large dollar amounts in this article — you might need “The Accountant” to help keep track.)

Fast-forward to the Fed’s Oct. 8, 2020, monthly report to Congress. The Fed had purchased over $12 billion dollars in corporate bonds in many different companies by the end of September. Of this amount, $4.133 billion was in direct corporate bonds and the rest in corporate bond ETFs.

Some companies involved in the fight against the coronavirus are part of the Fed’s new portfolio, including $18 million in bonds in Johnson and Johnson and $9 million in Eli Lilly, both of which are working on a coronavirus vaccine, as well as $23 million in Pfizer bonds. Pfizer will introduce its vaccine soon. The Fed also purchased $13 million of major virus tester Abbott Labs’ bonds.

Unfortunately, the Fed’s rules allowed it to purchase $73.5 million in Volkswagen Group of America Finance LLC bonds. You might recall Volkswagen dominating headlines for a while because of its emissions scandal. While many American companies such as Apple, Walmart and Ford are represented in its new portfolio, the Fed was really “Going in Style” when it purchased $43 million of bonds issued by Belgian brewer Anheuser-Busch InBev, which has major operations and sales of Budweiser in the U.S.

In addition to dabbling in corporate bond markets, the Fed has announced it is planning to keep interest rates low in the foreseeable future. (When rates rise, the value of the bonds it purchased will decline.) It does seem a bit of a conflict, though, that the Federal Reserve, with its ability to influence and adjust interest rates and therefore bond values, is allowed to purchase corporate bonds. Economists are probably wondering if capitalism is at “The Edge of Tomorrow.”

The program is scheduled to end Dec. 31. Bonds will either be held until maturity (when the issuing company pays them off) or sold on the open market. Since these bonds were purchased on bond exchanges, companies do not necessarily know that their bonds are owned by the Fed.