Minutes before midnight, the Fed announced yet another emergency facility aimed at ensuring credit markets don’t freeze up entirely as the COVID-19 public health crisis rapidly morphs into a financial crunch.
Just a day after reinstating both the crisis-era commercial paper funding vehicle and the primary dealer credit facility, the Fed moved to deflect criticism that steps taken earlier this week to thaw the CP market don’t address money market funds that may face redemptions (don’t say “runs”).
In short, some warned that the CP 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. 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”, BofA’s Mark Cabana remarked. “They’re worried about runs”.
“Outflows from prime money funds have been small to date, but given ongoing stresses in funding markets and heightened risk aversion, prime funds could see more outflows this week as investors take refuge in the safety of government money funds”, Zoltan Pozsar cautioned. “Such a rotation would further hurt demand for CD and CP this week and will continue to pressure funding spreads including U.S. dollar Libor-OIS”.
Enter the Fed.
“Through the establishment of a Money Market Mutual Fund Liquidity Facility, or MMLF, the Federal Reserve Bank of Boston will make loans available to eligible financial institutions secured by high-quality assets purchased by the financial institution from money market mutual funds”, the Fed said, in a statement.
This is specifically aimed at, quote, “assist[ing] money market funds in meeting demands for redemptions by households and other investors, enhancing overall market functioning and credit provision to the broader economy”.
The MMLF is blueprinted off the crisis-era AMLF, and the announcement of the facility comes just hours after Janet Yellen and Ben Bernanke implored the Fed to do more.
This is yet another invocation of 13(3), and Steve Mnuchin issued a brief statement. “I have sent Federal Reserve Board Chairman Jerome Powell a letter approving the establishment of the MMLF to provide liquidity to the financial system under section 13(3) of the Federal Reserve Act”, he said. “The establishment of the MMLF will enhance the liquidity and smooth functioning of money markets, support the flow of credit to hard working Americans, and help stabilize the broader financial system”.
Here’s what’s eligible:
1) U.S. Treasuries & Fully Guaranteed Agencies; 2) Securities issued by U.S. Government Sponsored Entities; 3) Asset-backed commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the Fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, is rated within the top rating category by that agency; or 4) Unsecured commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the Fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, is rated within the top rating category by that agency.
One imagines that Thursday will find short-end strategists detailing the finer points about how this facility is vulnerable, and why it too will be insufficient to end Jerome Powell’s current nightmare, where he’s trapped at a carnival playing Whac-a-mole with any and all funding market stress indicators.