Uncategorized
A slow build for the Fed balance sheet
admin | June 12, 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 Federal Reserve has rolled out an array of new programs since the beginning of the COVID crisis and resurrected several programs from the financial crisis. Most of the early interventions targeted financial market dislocations. These efforts have been very successful, in some cases without the Fed even having to follow through with significant purchases. The Fed is now moving on to a more difficult and new task: lending money directly to businesses and municipalities. Those programs have potential to grow to massive sizes if there is uptake. Growth in the Fed balance sheet so far is largely related to the Fed’s securities purchases and liquidity provision, however, not to its lending programs.
Balance Sheet Snapshot
The bulk of the expansion in the balance sheet since mid-March has come from Fed purchases of Treasuries and agency MBS (Exhibit 1). The next largest increase comes from the dollar swaps that provide dollar liquidity to overseas banks through their central banks. Meanwhile, the various lending facilities offered have generally had limited take-up.
Exhibit 1: Federal Reserve balance sheet
Note: * Figures for these categories exclude the equity capital supplied by Treasury to the Fed that backs these programs. Source: Federal Reserve.
In fact, aside from securities purchases and dollar swaps, the Fed’s balance sheet has expanded by only a few hundred billion dollars over the past three months. Moreover, several of the early programs, such as discount window lending, the Money Market Mutual Fund Liquidity Facility (MMLF), and the Primary Dealer Credit Facility (PDCF) are actually shrinking, as liquidity disruptions have largely resolved.
Meanwhile, the Fed resolved some other specific market dislocations without having to expend much money. The CPFF facility bought about $4 billion in commercial paper, mostly in late April, and has sat dormant since as commercial paper rates fell well below the rates at which the Fed offered to lend. Similarly, the investment grade corporate credit market improved dramatically with the announcement of the Fed’s primary and secondary Facilities. So far, the Fed has bought just slightly more than $5 billion in ETFs and no company bonds in the secondary market. It is difficult to imagine that many issuers will go to the Fed’s Primary Facility in light of the robust appetite of investors for new issue corporate paper and the narrowing spreads in that market.
Shifting gears
Up to now, the Fed has been in familiar territory, using its balance sheet to promote smooth market functioning. Its efforts on this front have been wildly successful, as risk spreads have narrowed dramatically since March. In fact, commentators are already beginning to talk about the possibility of asset bubbles thanks to the Fed’s accommodation.
Going forward, the Fed is venturing into new territory. The Main Street and Municipal Lending Facilities represent efforts to lend directly to business and municipalities, something that the Fed has never done before. These programs are just getting started. The MLF has executed one deal for $1.2 billion while the Main Street facility has yet to open. Media reports have suggested that neither businesses nor municipalities are excited to use the programs, as the terms are viewed as not especially attractive. In fact, the Fed has recently announced changes to both facilities in recent days in an effort to entice more borrowers.
If the facilities do generate significant interest, then the Fed balance sheet may expand rapidly in the coming months, but if the take-up is limited, then the bulk of the rise in the Fed’s assets will continue to be focused on securities purchases.
The way forward
The FOMC offered greater clarity on the path of securities purchases going forward at the June FOMC meeting. The Fed intends to buy at least a net $80 billion in Treasuries and add a net $40 billion in agency MBS each month for the foreseeable future. The Fed will be buying $120 billion per month, which would amount to around $750 billion over the balance of the year.
Meanwhile, the liquidity provision programs are likely to shrink somewhat going forward. The NY Fed announced changes to the terms of its repo operations this week that are likely to reduce usage over the next few months as the repo market has gotten back to a healthier state, while dollar swaps are going to begin maturing soon and may roll off to some degree.
If the Main Street and Muni Liquidity Facilities see limited action, then the Fed’s balance sheet may not even get to $8 trillion by the end of the year, well short of where most analysts would have imagined a few months ago. In contrast, if those two facilities see the enthusiastic response that the PPP enjoyed, then the Fed’s balance sheet could approach $8.5 or even $9 trillion by the end of 2020.
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 © 2025 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.
