On Tuesday evening, the Fed added yet another facility to ensure liquidity is ample and ameliorate pressure in credit and funding markets.
Just hours after reinstating the crisis-era commercial paper funding facility, the Fed announced the reopening of a credit facility for primary dealers.
This looks like an effort to allay concerns that the steps taken thus far aren’t sufficient to free up dealer balance sheets. As the Fed puts it, “the facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households”.
“Credit extended to primary dealers under this facility may be collateralized by a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities”, the Fed goes on to say, in a statement.
So, essentially, primary dealers can now post anything from high grade bonds to stocks as collateral for cheap funding.
Not eligible, though, are ETFs or mutual funds. When it comes to CMBS, CLOs and CDOs, only AAA-rated securities are eligible. On commercial paper, the Fed will accept both A1/P1 and A2/P2.
“The pledged collateral will be valued by Bank of New York Mellon according to a schedule designed to be similar to the margin schedule for lending by the Discount Window, to the extent possible”, the Fed says, in a supplementary information sheet (embedded below)
This funding is offered overnight and on a term basis up to 90 days, starting Friday. The facility will be operational for at least the next six months “or longer if conditions warrant”.
The purpose here is to ensure that balance sheets are unencumbered and can be “liquified” – so to speak – at any time, now via OMO collateral “plus” anything else that can be plausibly described as “investment grade”.
Again, this comes just hours after the reinstatement of the commercial paper funding facility, a step made necessary by the freezing up of the CP market, where spreads had ballooned wider, threatening to impair the ability of US corporates to conduct day-to-day business.
Although analysts spent the better part of two weeks effectively demanding the Fed step in to avert a scenario where more and more companies are forced to draw down credit lines in the absence of access to the commercial paper market, strategists were underwhelmed.
“At OIS + 200, it does not work because then the rate cuts to zero are not effective, very simply put”, the incomparable Zoltan Pozsar said of CPFF2020. “All segments of funding markets — secured, unsecured and FX swaps — still show signs of stress”, Pozsar said, prior to the rollout. “The Fed needs to become a buyer of CDs and CP, but not through the CPFF”.
He also said the Fed should expand access to swap lines outside of the G-7, something others have called for repeatedly.
In a phone interview with Bloomberg, BofA’s Mark Cabana said the facility isn’t sufficient because although it helps issuers, it won’t do anything to help money funds that need to offload their own assets.
Long story short, Cabana notes that while dealers can tell issuers to simply go knocking at the Fed, money funds may still have a hard time finding someone to take their inventory if they need to fund outflows. “Money funds are still stuck”, Cabana remarked. “They’re worried about runs”.
Now we’ll see what short-end strategists think of this latest effort from Powell to get ahead of the curve, placate critics and otherwise ensure that the proverbial “plumbing” doesn’t become so clogged amid the coronavirus panic that a health crisis morphs into a full-blown financial calamity.
Steve Mnuchin says he green-lighted the move.
Details on the PDCFmonetary20200317b1