The Federal Reserve added smaller municipalities on Monday to its $2.3 trillion debt-buying program to help shore up Main Street businesses, municipalities and credit markets during the coronavirus pandemic.
The inclusion of smaller U.S. locales to the Fed’s $500 billion municipal lending facility means that cities with at least 250,000 residents now can borrow from the program, as well as counties with at least 500,000 residents.
During the worst of the March market slide, municipal money-market funds lost about $11 billion, or nearly 10% of their assets as investors sold what they could to tap liquidity, wrote MarketWatch’s Andrea Riquier.
The latest expansion of the Fed’s facilities comes in addition to its “unlimited” bond purchase program unfurled last month to unclog the U.S. Treasury and government-backed mortgage bond markets, as well as its plans to buy up corporate debt for the first time ever.
The lending facilities now are open to riskier assets, including debt backed by battered hotels, office buildings and other commercial property types, as well as weaker speculative-grade businesses, where defaults are still expected to hit 21% over the next two years.
Financial markets have gotten steadier since March, thanks to the Fed’s efforts to bolster markets and the $2 trillion CARES Act passed by Congress to help offset skyrocketing unemployment. The Dow Jones Industrial Average DJIA, +1.50% was up 1.5% Monday, but was still down more than 15% on the year to date.
As more than a dozen states start to reopen their economies, or at least begin to scale back strict lockdowns, a clamor also has begun to build for more oversight and for better explanations for the Fed’s “whatever it takes” approach to bolstering areas of the economy, an effort that is expected to grow its balance sheet to a record $10 trillion by early next year.
Here’s a breakdown of the Fed’s efforts:
March 15:In a surprise weekend move, the Fed cut benchmark rates by 100 basis points to a range of zero to 0.25%, but said not to expect U.S. benchmark rates to be pushed into negative territory, like some foreign central banks.The central bank also announced it would be using its balance sheet to help lenders, businesses and households absorb the shock of daily American life grounding to a halt.
March 15: Plans unfolded to buy at least $700 billion of U.S. Treasury debt and “agency” mortgage bonds, or assets with government backing, in a bid to soothe tumult, even safe-haven assets, as investors rush to sell what they can to raise cash.
Agency mortgage bonds are sold by housing giants Freddie Mac FMCC, -2.17%, Fannie Mae FNMA, -3.27% and Ginnie Mae and come with government guarantees, which in functioning markets, makes them as easy to sell as Treasury bills, notes and bonds.
March 23: In a dramatic move, the Fed said aggressive action was needed to soften the blow of the pandemic. It vowed to buy an unlimited amount of bonds that already have government backstops, including some commercial mortgage debt.
March 17: Fed invokes section 13(3) of the Federal Reserve Act to provide a backstop for a key source of short-term funding for big businesses, after calls by investors for the U.S. central bank to unclog the so-called commercial paper market. It is a roughly yearlong program that aims to support the real economy, rather than just the financial sector, by helping businesses meet payrolls, inventory payments and other short-term liabilities.
Primary Dealer Credit Facility
March 18: Another 13(3) program to supply key dealers of securities on Wall Street with up to 90-day loans to jump-start trading again and boost liquidity across financial markets. A range of collateral will be eligible, from commercial paper to municipal bonds to asset-backed securities, as well as equities.
Primary Market Corporate Credit Facility
March 23: Emergency Stabilization Fund is tapped for three new 13(3) credit facilities. They initially will fund $300 billion in new loans. The first, the PMCCF will be open to investment-grade companies seeking new loans or bond financing. Borrowers may be allowed to defer principal and interest payments for six months initially, to keep cash on hand to pay employees and suppliers. The idea is to prevent companies facing pandemic fallout from shedding employees and business relationships, which could further damage the economy.
Secondary Market Corporate Credit Facility
March 23: SMCCF is established to sop up existing corporate debt with investment-grade ratings, including exchange-traded funds, which in recent weeks have been pummeled by record outflows.
April 9: Fed beefed up its primary and secondary corporate credit facilities to provide up to $750 billion worth of credit, now also including “fallen angels,” or companies whose BBB credit ratings have been downgraded to junk territory. However, the facility won’t fund banks that take customer deposits or companies that received specific support from the $2.2 trillion CARES Act.
Term Asset-Backed Securities Loan Facility (TALF 2.0)
March 23: Fed revives another 13(3) crisis-era program to gives companies like Ford Motor F, +6.16%, American Express AXP, +2.27% and others heavily involved in consumer credit an easy way to sell new asset-backed bonds for funding without much risk, since the Fed is providing a backstop. To be eligible, the bonds must be AAA-rated, and backed by new or recently originated student loans, unsecured consumer loans or small business loans.
April 9: TALF is expanded to include existing AAA-rated commercial mortgage-backed securities, or bonds used to finance office towers, shopping malls and other commercial property types. Collateralized loan obligations, which are funds that buy up loans to debt-laden companies, will also be eligible. The size of the facility stays at $100 billion.
April 3: Fed’s hallmark $350 billion Paycheck Protection Program to help small business employers pay their employees during the pandemic kicks off with a rocky start. Funding was quickly depleted and on April 24 Congress injected it with another $320 billion, although House Speaker Nancy Pelosi has begun to question aspects of the small-business lending effort.
April 9: Fed rolls out a new $600 billion Main Street Lending Fund to support small and midsize businesses with 4-year loans a rate between 2.5% to 4% above the secured overnight funding rate, which stands at zero. Principal and interest payments are deferred for one year. The loans will be originated by banks, who will retain a 5% share and sell the rest to the Fed’s facility.
March 20: The Fed uses its crisis-era powers to roll out another new program to help rescue the municipal-bond from soaring yields, a sign that investors are concerned about rising defaults. The plan expands its money-market mutual fund program to let banks get loans from the Fed by using assets purchased from single state and other tax-exempt municipal money-market mutual funds.
April 9: Fed rolls out the Municipal Liquidity Facility to offer up to $500 billion in short-term loans to states and municipalities, with funding through the CARES Act. It is expanded to include smaller cities and counties and the Fed will now buy up to 3-year debt.
Currency swap lines:
Global market volatility also has led to a desperate dash for U.S. dollars, the world’s reserve currency, writes MarketWatch’s Greg Robb, in no small part because the greenback is used for most international trade and payments. Analysts say the rush into dollars has amplified the world-wide equity selloff and volatility across financial markets, as many industrial nations all but shutter their borders in an attempt to contain the spreading pandemic.
March 19: To help ease dollar funding strains, the Fed sets up $30 billion to $60 billion worth of U.S. dollar swap lines with nine central banks in Asia, South America and Europe, which are expected to stay in place for at least the next six months. The Fed already had standing facilities with central banks in Canada, England, Japan, New Zealand and the European Central Bank.
March 20: The Fed and five other major central banks move together to bolster their global funding efforts by moving to daily seven-day U.S. dollar funding facilities, up from weekly ones. In addition, the group of central banks will keep offering weekly 84-day maturity U.S. dollar operations to help tamp down market turmoil.
Since chaos erupted in the overnight lending market in September, the Fed has been offering billions of dollars’ worth of short-term loans to Wall Street’s roughly two dozen “primary” securities dealers to help ease pressure in this key corner of the market.
What do market participants say?
“We see little risk that near-zero short-term rates will be altered either later this year or early in 2021,” wrote Steven Ricchiuto, U.S. chief economist at Mizuho, in a daily note Monday. “In fact, we are assuming rates won’t go up until 2022. Moreover, we expect the Fed’s [balance sheet expansion through debt buying] to fund the entire cost of the CARES Act, and we expect this expansion of the Fed’s balance sheet will be permanent.”