The Fed’s balance sheet topped $7 trillion in the latest update, a milestone that is all at once impressive and somewhat dubious.
Even if you didn’t know anything about the crisis that’s decimated the global economy, leaving tens of millions jobless and hundreds of thousands dead, you’d be able to discern that something was wrong simply by eye-balling the chart.
Pretend you’ve been asleep for the past three months, and last you heard, the Fed was still just buying a token amount for “reserve management purposes”. Then you wake up to this:
Clearly, something went awry.
But, as offensive as the Fed’s splurge is to so many critics, it’s been effective pretty much across the board when it comes to restoring a sense of normalcy, whether we’re talking about the cost of dollar liquidity, smooth functioning in critical funding markets or more pedestrian topics like reduced signs of stress in corporate credit.
The Fed on Friday said it will trim Treasury buying to $5 billion per day in the week ahead. This has become a Friday tradition. Eventually, they’ll settle on a monthly amount, and likely pair that with an announcement of yield curve control.
It’s worth keeping yourself apprised of the weekly data from Lipper and ICI on fund flows, as you can divine something about the extent to which things have normalized.
Investment grade funds enjoyed a sixth consecutive week of inflows through Wednesday on Lipper’s data. The $5.33 billion haul came on top of similarly sized inflows over the previous two weeks.
The important thing to note about the chart is the extent to which the hemorrhaging in late March turned into a steady stream of inflows following the Fed’s announcement that it will buy corporate bonds, although it took a couple of weeks for things to turn around in earnest.
In high yield, you can see a similar dynamic. Junk funds took in $1.64 billion last week. That’s the eighth straight inflow.
So far, the Fed has bought $1.8 billion in corporate credit ETFs. The first purchase ($305 million) showed up in last week’s balance sheet update, with the remainder reported this week, current through May 20.
The figure gives you a snapshot of the mix vis-à-vis the Fed’s various liquidity facilities and programs aimed at fighting the crisis.
Finally, I would submit that it’s worth flagging the first outflow from government money funds since February.
The latest ICI data shows prime funds took in $13.84 billion last week, versus an outflow of $12.85 billion for government funds.
This is notable, as it’s yet another sign of normalization or, if that’s not quite right, let’s just call it “confidence”.
As ever, the whole thing is a bit of a paradox. The extreme abnormality evidenced in the explosion of the Fed’s balance sheet has paved the way for “normalization” across various markets. The problem (and this has been true since the financial crisis), is that these markets would likely start to malfunction again in the absence of Fed support.
It’s a sign of addiction – you have to be drunk (or high) to function properly.