The Market Today

Fed Launches Financial Crisis-Era Programs to Keep Markets Functioning

by Craig Dismuke, Dudley Carter

CORONAVIRUS TURMOIL – Fed Re-Launches Financial Crisis-Era Programs

Commercial Paper Funding Facility: The Fed announced yesterday that it was establishing a Commercial Paper Funding Facility (CPFF) to more directly reach households and businesses with increased credit flow. The program, coined CPFF2020 and similar to one established during the 2008 financial crisis, “will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies.” The program has issuer size limits, offers funds for a term of three-months priced at the 3-month OIS rate plus 200 bps, and will run for one year unless the Fed opts to extend it. The Treasury signed on by providing credit protection to the Fed’s lending offer of up to $10B.

Fed Announced Credit Facility To Address Liquidity Issues Away from Risk-Free Treasurys: At 5 p.m. CT, after both the equity and Treasury markets closed for the day, the Fed issued an additional statement announcing its latest emergency program. The Fed’s new “Primary Dealer Credit Facility, or PDCF… will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households.” The new funding scheme offers funds for a period of up to 90 days and will run for at least six months. Any funds borrowed under the PDCF can be backed by “a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.” Borrowers will be charged a rate equal to the discount rate, which the Fed cut to 0.25% as part of its emergency decision on Sunday. The Fed’s latest step more directly addresses liquidity issues in other markets away from risk-free Treasurys.

Another Increase in Repos: In addition to the new facilities, officials announced for a second day an unscheduled overnight repo operation of $500B to facilitate smoother market functioning amid evidence of dislocations and disruptions.



Housing Data Mixed before Virus: Mortgage applications for the week ending March 13 fell 8.4% as the average 30-year mortgage rate jumped 27 bps to 3.74%.  Housing starts for the month of February fell 1.5% MoM and January’s previously reported decline was revised to a 1.4% gain.  Building permits dropped 5.5% in February.  All of this data precedes the virus turmoil and is, therefore, irrelevant. More interesting will be tomorrow’s initial jobless claims  report covering the week of March 14.  Anecdotal indicators point to an ugly report.


Evidence of Disruptions Piled Up: While evidence showing that the coronavirus is causing significant economic damage continued to pile up, investors took some solace in the strong, seemingly coordinated efforts of U.S. officials in fighting back against the significant disruptions. Before U.S. trading, an index tracking economic expectations plummeted 60 points, the most on record, to the lowest level since the European credit crisis. Later, a global airline industry association speculated that the shutdown of air travel could require up to $200B to in assistance and aid for the industry to survive the crisis. Apple said its global store closures outside of China will now continue indefinitely. Amazon said it was prioritizing capacity to fulfill essential orders over more discretionary purchases. Marriott International announced it would begin furloughing tens of thousands of workers without pay. Several major automakers announced they were suspending production, although others declined to follow.

Significant Stimulus Response Shows Conviction of Defeating COVID: And still, stocks staged a more-than-5% recovery following Monday’s historic crash and Treasury yields rose sharply. The Fed announced it will offer $500B in overnight repos twice each day for the remainder of the week to ease liquidity constraints. More importantly, it announced the establishment of a crisis-era commercial paper facility as a more potent fix to provide credit flow to U.S. businesses (more below). On the fiscal front, early-morning news reports indicated the White House would propose a fiscal stimulus package totaling $850B. During the White House’s daily virus briefing, in which the CDC reiterated its 15-day guidelines announced on Monday aimed at blunting domestic spread, President Trump said “we’re going big” on fiscal aid. Treasury Secretary Mnuchin later confirmed the proposed stimulus package would total $1T, in addition to roughly $300B in tax deferrals for certain individuals and businesses. The stimulus package will include loans to certain industries most directly disrupted by the virus, liquidity assistance for small businesses, and means-tested checks directly to U.S. households by the end of April. The stimulus plan would be in addition to the $8.3B passed two weeks ago and the House-passed bill the Senate has said it will put to a vote.

Equities Snapped Back and Treasury Yields Notched Historic Jump: The double-barreled stimulus from the central bank and Trump administration lifted stock prices steadily throughout the afternoon. The Dow closed up 5.2% while the S&P 500 rallied 6.0%. Worth noting, more defensive sectors led all others higher. While the economic efficacy of the stimulus is yet to be determined, the impact of more than $1T of new federal spending on the deficit is more certain. Considering the obvious deficit implications, Treasury yields rocketed higher. The 2-year yield rose 13.3 bps to 0.49% while the 10-year yield shot 36 bps higher to 1.08%, its biggest daily increase since June 1987. The 30-year bond yield broke 40.0 bps higher to 1.68%, its largest jump since February 1982. The spread between the 2- and 10-year yields widened out more than 21 bps, the sharpest steepening since August 2011, to more than 57 bps, the largest premium since March 2018. The Fed did not announce its new credit facility until after the markets closed.


Market Volatility Has Become a Mainstay: Global markets continued to swing back and forth overnight as investors digest the overwhelming amount of fiscal and monetary stimulus announced in recent days to soften the blow of a sudden stop of economic activity around the globe. As discussed above, the Fed announced new and enlarged overnight repo facilities alongside two crisis-era funding facilities and the White House is attempting to finalize an additional $1T in virus-focused fiscal stimulus. And yet, U.S. equity futures were halted for trading after tripping limit-down locks late in the Asian session. A measure of Asian equities tumbled more than 2% while and the Stoxx Europe 600 was trading down 4.6% at 7:15 a.m. CT.

FedEx Says China is Going Back to Work, Rest of the Worlds Sees Virus Spread Continue: Offering a glimpse of normalcy in extraordinarily abnormal times, FedEx said it is seeing signs of industrial life in China. In its earnings call on Tuesday, company executives indicated that its activity in China had recovered more than expected, signaling China’s economy may really be coming back on line as its government has led the world to believe. Nonetheless, the rest of the world has come to a sudden stop as governments wage war against COVID-19. Global coronavirus cases crossed over 200,000 and there continues to be no clarity on how successful the draconian social distancing measures taken will be at slowing its spread. The contractionary economic impact of those necessary but extreme measures, however, is more clear.

Hard to Find a Safe Place to Hide: Despite the Fed’s efforts to provide unprecedented levels of liquidity via several separate facilities, there is evidence that the sell-everything mindset remains entrenched. Oil prices have dropped sharply with U.S. WTI plunging more than 9% to below $25 per barrel, a low back to 2002. Gold, which typically benefits from uncertainty, was down more than 1% at a new 2020 low. While equity futures remained halted, a popular ETF which tracks the S&P 500 was still trading and down 5.6%. Treasury yields remained volatile and the curve continued to steepen. The 2-year yield was down 4.7 bps to 0.45% as the 10-year yield rose 1.5 bps to 1.09%. Before falling back, the 10-year yield had climbed as many as 14 bps as European yields moved sharply higher with markets pricing in increased issuance to support fiscal spending. Germany’s 10-year yield was 16 bps higher on the day.


Disregarded Economic Data Showed Less Momentum Heading into Virus Shutdown: After a modestly disappointing reading on retail sales for last month released earlier in the day, the manufacturing production component of the Federal Reserve’s industrial production report for February missed expectations. Both reports showed slightly less economic momentum heading into the more dire virus backdrop of March. Even more stale, data for January showed job openings had recovered more strongly than expected to start the year. Of all of Tuesday’s data, the March home builder sentiment index from the NAHB was most likely to better reflect any virus effect. Despite some mortgage rate estimates plunging to record lows in recent weeks, home builder sentiment slipped more than expected but remained solid. That trend may worsen next month, with the NAHB’s Chief Economist noting “the rising economic impact of the coronavirus will be reflected more in next month’s report.”

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