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    Instant Insights: QE infinity and beyond

    Instant Insights: QE infinity and beyond

    April 09, 2020 Global macro, Instant insights

    The recently-passed $2trn stimulus bill provided the Fed with some key new tools (in addition to their unlimited Treasury and MBS purchases); today the Fed brandished these tools aggressively.

    As a reminder, the bill (known as the CARES Act) allows the Fed to lever an additional $454bn in the Treasury’s Exchange Stabilization Fund (ESF) by 10:1, providing up to $4.5trn of incremental buying power. The Fed today offered details of $2.3trn of those plans.

    Potential relief for fallen angels and high yield

    As we mentioned recently, the Fed has two new programs for purchasing corporate debt. These have now been upsized to $750bn from $200bn, supported by $75bn of Treasury funds.

    The facilities can now lend to non-bank issuers that – crucially – held at least two investment grade ratings as of the 22nd of March. So recent fallen angels, and not just investment grade companies, can receive loans. The Fed will also buy high yield ETFs.

    Elsewhere, the TALF, which purchases asset-backed securities, will now be able to purchase commercial mortgage-backed securities (CMBS).

    Main Street Lending Program unveiled

    The Fed launched an eagerly-awaited Main Street Lending Program with an initial size of $600bn. It allows banks to sell 95% of each loan (made to a company with fewer than 10,000 employees) to the Fed. They retain the other 5% for skin-in-the-game purposes. Loans can be for up to four years at +250bp to +400bp above the Secured Overnight Financing Rate (SOFR) with a one year deferral.

    By leveraging banks, this initiative can potentially get up and running more rapidly. It helps address the middle ground of companies too big for Small Business Administration (SBA) programs, but too small to access the corporate bond market. The Treasury will also provide $75bn of equity support.

    Regarding small companies, as part of the recent stimulus package, the Treasury earmarked $350bn for small businesses, which are forgiven (i.e., revert to grants) as long as employees are retained. This is conducted through the SBA and known as the Paycheck Protection Program (PPP). The Fed announced it will provide financing for banks originating these to ensure lenders have the capacity to continue originating without crowding out other lending activity.

    Whatever it takes

    Chairman Jay Powell is providing a strong signal that no creditworthy borrower will lack access to funds.

    In total, these programs could inject $1.95bn of liquidity to credit markets in addition to enabling smooth functioning of PPP originations. The Treasury is using $195bn of the ESF to support these programs. This means each could be doubled if necessary without the Fed exhausting its resources.

    Wartime-level stimulus

    These new intiatives are set to provide significant new support to credit markets and aim to ensure that companies operating in the real economy will be able to weather the downturn.

    The scale of the Fed’s efforts to support the economy and degree of coordination with the US Treasury are comparable to, if not greater than, its response to World War II.

    Credit looks strategically attractive

    These efforts further underpin our view that credit asset classes offer significant strategic value. We believe these policies will increasingly enable the economy to rebound strongly when public health conditions permit.

    The Fed’s actions, and the knowledge it can do even more, will likely offer further comfort to investors that markets can continue to function regularly, that defaults will be reduced, and that by keeping companies operating, the economic impact of the virus may not linger too long after the disease itself is contained.

     

     


    Please note: any forecasts or opinions expressed herein are Insight Investment's own as of April 9, 2020 and subject to change without notice. This information may contain, include or is based upon forward-looking statements. Past performance is not indicative of future results.

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