The Market Today
FOMC Fires Another Barrage of Tools
by Craig Dismuke, Dudley Carter
FOMC EXPANDS LENDING AND LIQUIDITY PROGRAMS FURTHER
Expand QE from $700 Billion to the “Amount Needed”: In another emergency policy meeting, the Fed voted unanimously to increase its QE purchases from $700 billion to whatever amount is needed to ensure the smooth functioning of the markets. According to the Official Statement, “Federal Reserve will continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions. The Committee will [also] include purchases of agency commercial mortgage-backed securities.”
$300 Billion in New Funding Programs: In addition to the expansion of QE, the Fed also announced new programs to facilitate the flow of credit to businesses and consumers. The programs are capitalized with $30 billion in equity from Treasury, using its Exchange Stabilization Fund. With the $30 billion in capital, the Fed indicates these programs will provide up to $300 billion in new financing for these three programs. The new programs include the Primary Corporate Credit Facility (PMCCF), the Secondary Market Corporate Credit Facility (SMCCF), and the Term Asset-Backed Securities Loan Facility (TALF).
PMCCF – Loans to Large Employers: The Primary Corporate Credit Facility will “support credit to large employers … for new bond and loan issuance.” The PMCCF will provide bridge financing of four years to investment grade companies. The companies will be able to defer interest and principal payments during the first six months. This is likely to assuage some of investors’ fears that corporations will not be able to meet cashflow needs during a period of a complete stop in revenues.
SMCCF – Smooth Functioning of Corporate Bond Market: The Secondary Market Corporate Credit Facility will “purchase in the secondary market corporate bonds issued by investment grade U.S. companies and U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. investment grade corporate bonds.” One future challenge could be a potential wave of downgrades dropping some corporate bond ratings below investment grade.
TALF – Increased Liquidity for ABS: The Term Asset-Backed Securities Loan Facility is designed to “enable the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.” The TALF will provide non-recourse loans to holders of “certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.” This should help compress credit spreads and add liquidity to these key areas of lending.
Expansion of Last Week’s MMLF and CPFF: Additionally, the existing Money Market Mutual Fund Liquidity Facility, announced last week and designed to provide liquidity to prime money funds, will now accept a wider range of collateral. The Commercial Paper Funding Facility, also announced last week and designed to add liquidity to the critical commercial paper market, will now be able to purchase tax-exempt commercial paper.
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COVID Concerns Remain the Focus: There were several developments over the weekend, and the lack of one key development, that led U.S. equity futures to a quick trade halt once Asian markets opened late Sunday evening U.S. time. Abroad, the virus statistics in Italy continued to trend in a distressing direction at a disconcerting pace and Germany closed non-essential businesses and banned gatherings of more than two individuals, requirements that will be monitored and enforced by law. Here at home, the number of U.S. governors announcing statewide lockdowns grew as more and more swaths of the U.S. economy continued to grind to a halt. St. Louis Fed President Bullard made headlines Sunday evening when he said that the unprecedented sudden stop of economic activity, while necessary to slow the virus’s spread, could push unemployment as high as 30%.
Fiscal Aid Talks Breakdown, Fed Goes Big: However, most damaging for the markets and directly responsible for the trade-halting open in Asia was a failed cloture vote in the Senate on the fiscal package. U.S. senators voted 47 to 47 on a motion that would have limited debate on the massive fiscal package that markets have been anticipating and believe is necessary to shore up sentiment. Democrats and Republicans disagreed on the best way to support the American worker, leading to the breakdown and a likely delay on further action until at least noon today. However, sentiment has since shifted sharply within the last hour as the Fed announced an incredible package of new measures it’s taking to support the U.S. economy. With QE now effectively unlimited and the establishment of programs directly aimed at Main Street and U.S. households, equity futures rocketed higher into positive territory. Contracts on the S&P 500 swiftly shifted from down 3.2% to up by even more than that. Treasury yields, which were already lower, tumbled to send the 10-year yield down as many as 16 bps to as low as 0.69%. Credit spreads tightened and the Dollar dropped.
ICYMI – March 20, 2020 Weekly Market Recap: Investors capitulated last Monday sparking a sell-off that sent the major indexes to their worst days since 1987. After sharp daily swings for the remainder of the week, U.S. equities registered their worst weeks since 2008. COVID-19 case counts hit exponential growth rates, the current economic data was disastrous, and major national and state economies began to go on lockdown. Multiple states in the U.S., including California and New York, issued orders telling non-essential businesses to close and citizens to stay home. Reports from state agencies showed unemployment claims spiking, signaling millions of consumers could become unemployed in the weeks ahead. As the week unfolded, the amount of fiscal stimulus announced by major world governments piled up as they fight to keep their economies from crumbling. The major central banks, including the U.S. Federal Reserve, announced the launch of multiple crisis era policy tools as they seek to play their parts in the multi-faceted war against the coronavirus. In the U.S., officials took steps toward a fiscal package that had grown to more than $1T by Friday. The Fed kicked off a flurry of actions Sunday ahead of last week’s market open by announcing a 100-bp rate cut back to the zero bound (0.00%-0.25%), $700B in new asset purchases (QE), more enticing discount window terms, and enhanced Dollar swap lines with foreign central banks (later enhanced from a weekly occurrence to daily). By the end of the week, the Fed had established a Commercial Paper Funding Facility, Primary Dealer Credit Facility, Money Market Mutual Fund Liquidity Facility (later enhanced to include short-term municipal securities), additional Dollar swap lines with nine other central banks, and $1T in daily overnight repo operations through April 13. Click here to view the full recap.