Uncategorized
The government CARES as the Fed boosts balance sheet
admin | March 27, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The CARES Act offers support to pretty much every US business and individual. The size and coverage is a good effort to cushion the blow from the coronavirus. Many are asking if it will be enough, but that is not the right question yet. The more pertinent question is how quickly can the government distribute the money and get to the right people.
I am actually pretty optimistic on this front after listening to Secretary Mnuchin at recent coronavirus task force briefings. He said that the checks to households will be sent out within three weeks through direct deposit and that funds to small businesses would begin to flow by early April. Some portion of the $450 billion allocated to help businesses and governments will backstop the Fed’s Main Street Lending Facility and get levered 10 times. That means several trillion in funding. The market should hear from the Treasury and the Fed regarding this facility within 10 days.
To be fair, the Fed has its hands full. The market still needs final details on all of the facilities already announced, so it would be unrealistic to expect the Main Street Lending Facility to be up and running in less than a week or two. Chairman Powell made a rare appearance on the Today Show on March 26, an effort to reassure the general public that the economy will rebound and that the Fed has plenty of ammo left to continue to support the economy. It was a good effort and a smart idea.
On the economic front, people have been buzzing about the initial claims figure all week, and the reading exceeded most expectations, surging to more than three million. Looking at the state-by-state breakdown, there should be more to come in the current week, with the data released on April 2, more likely than not even higher than the March 26 reading. Hopefully, the number of new filers will peak in the current week and begin to trail off after that, especially since the fiscal bill should help to stem the bleeding of layoffs at small businesses going forward. Clearly, the March 26 numbers show the depth of the short-term shock. At this point, Q2 GDP could drop 15% and the unemployment rate could spike to 6% in April. However, in some sense, the magnitude of the fall in GDP or the spike in the unemployment rate is less important than when things begin to turn and how rapidly the economy gets back to some sense of normal. We all have our best guesses there, but they remain speculative.
Financial markets have a better tone, but there are still plenty of divides. For CRT paper, CLOs, or other areas that have yet to see efforts from the Fed, things may not feel better. But the most liquid markets—financing, Treasuries, agency MBS, investment grade corporates—have improved considerably, though the degree to which Treasury bill rates have moved into negative territory is a little disconcerting. It will be interesting to see whether the Fed slows the pace of Treasury and agency MBS purchases for next week, perhaps a first concrete signal of modestly less pressure.
An update on the Fed’s balance sheet
The weekly publication of data on the Fed’s balance sheet shows the early infusion of liquidity into various sectors of the financial system, as well as how much remains to be done.
Balance Sheet Changes
The Federal Reserve’s weekly snapshot of its balance sheet came out Thursday afternoons in its H.4.1. With the announcement of a variety of new programs, this dataset will be the vehicle for tracking the usage of various facilities. The first weekly edition since many of these programs were announced offers a look at the Fed’s liquidity infusion into the financial system. The details are presented in Exhibit 1.
Exhibit 1: Fed Balance Sheet Components
Source: Federal Reserve
As the exhibit shows, the main source of liquidity infusion continues to be the Fed’s purchases of Treasuries and agency MBS. The pace of those buys has been massive this week. In fact, the cumulative purchases over the last two weeks has been equivalent to one of the rounds of QE undertaken in the years after the Financial Crisis, though those rounds of QE were executed over extended periods (usually 6-9 months). With those markets showing less stress, I would expect the pace of buying to recede going forward.
Funding stress has also abated, which is seen in the table by a $90 billion drop in the amount of repos outstanding. However, another aspect of the stress in funding markets was the shortage of dollar liquidity globally, and the central bank swap facilities opened up and enhanced over the last two weeks were being utilized heavily, with over $200 billion outstanding as of Wednesday.
The Fed has announced six major facilities this month. Two relate to the commercial paper market, the Commercial Paper Funding Facility (CPFF), and the Money Market Mutual Fund Liquidity Facility (MMLF). These facilities cover the primary and secondary market for term CP, respectively. Similarly, the Fed announced the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF) to support the IG credit market’s primary and secondary markets, respectively. The Primary Dealer Credit Facility (PDCF) offers inexpensive term funding for a variety of asset types that were experiencing illiquidity. Finally, the Term Asset-Backed Securities Lending Facility (TALF) is designed to support the continued flow of new issue ABS in an effort to keep credit available to households and businesses.
Programs designed to support primary issuance require a tremendous amount of preparation and infrastructure building, so these facilities are not yet operative. In fact, it could be a few more weeks in some cases before we see anything out of several of these facilities. If financial market stress continues to abate, some of these programs may not even be used. There is precedent for that, as a couple of the Financial Crisis-era programs were never drawn on.
As of Wednesday, only two of these “alphabet soup” facilities have begun to operate. The PDCF had $28 billion outstanding as of Wednesday, while the MMLF had $31 billion outstanding.
Finally, discount window usage roughly doubled to $50 billion.
Coming Attractions
All told, the Fed’s balance sheet swelled to $5.216 trillion as of Wednesday. To put that figure in perspective, the prior peak of the balance sheet after the Financial Crisis was $4.5 trillion, so the balance sheet run-off that occurred over a two-year period has been reversed plus $750 billion in a matter of weeks, and we have a handful of programs yet to even come on stream.
In fact, prospectively, the largest program of all will be the Main Street Lending Facility laid out in the fiscal relief bill. With roughly $450 billion in potential backstop, the Fed could lend as much as $4 trillion to businesses in the coming months to keep them afloat.
In sum, the Fed’s balance sheet has expanded rapidly and will likely to continue to do so for the foreseeable future.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
