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The Federal Reserve is making its first-ever foray into the junk-rated corporate bond market, saying it will consider buying noninvestment-grade corporate bonds and exchange-traded funds.

As part of an effort to make available $2.3 trillion in new loans amid the coronavirus crisis, the central bank said Thursday that it would buy the bonds of “fallen angel” companies, or companies that get downgraded from investment grade to junk. Companies will qualify if they had an investment-grade rating on March 22 and have since been downgraded to one of the top three tiers of the high-yield bond market (BB+, BB or BB-).

That means it can now buy bonds from Ford Motor (ticker: F) and similarly situated companies. The decision offers relief to some of the companies facing the worst pandemic-related pressure: Companies that were considered high quality before the coronavirus shut down the economy and tanked cash flows.

Ford had an investment-grade rating on March 22, one day before the U.S. central bank rolled out its corporate bond-buying programs. S&P and Fitch rated it one and two tiers above junk, respectively. Moody’s had it at BB+, the top tier of the high-yield market. Since then, all three firms have downgraded the auto maker by one notch, in effect pushing Ford’s upwards of $36 billion of fixed-rate bonds into the high-yield market.

Several large companies have been downgraded to junk in recent weeks, and many more are expected to see their ratings fall as a coronavirus-created economic halt causes companies’ cash positions to deteriorate.

About 47% of the investment-grade bond index is made up of companies rated three levels above junk or less. Bank of America says that around $200 billion of bonds could be downgraded from investment grade to high yield across the downturn cycle. Citigroup says that $200 billion to $300 billion could get downgraded just this year, at least doubling the prior single-year record from 2002.

The Fed’s ability to buy junk-rated bonds has one caveat: It won’t be able to use as much leverage to buy those companies’ bonds. To buy investment-grade debt, the Fed can leverage the Treasury’s cash 10 times over, so the vehicle can buy $10 of bonds for every $1 the Treasury has invested in the vehicle. For high-yield bonds, the Fed will be able to buy only $7 for every $1 committed.

That would limit the total possible amount of bond purchases, and leave the Fed’s two vehicles—one for primary-market purchases and one for secondary-market purchases—holding less than $750 billion in total.

The central bank also will be able to venture into securities that may be even riskier than fallen angels, though it would need to limit the amount of leverage used for those purchases as well. Specifically, its latest release about its bond-buying program allows the central bank to buy exchange-traded funds that focus primarily on high-yield debt. For those purchases the vehicle will only be able to leverage up the Treasury’s money between three and seven times over, depending on risk.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com