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Fed Fires Round Four - Buying of Commercial Paper


1. The Federal Reserve Board announced today that it will establish a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses.The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies.

2.The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury's Exchange Stabilisation Fund (ESF). The Federal Reserve will then provide financing to the SPV under the CPFF. Its loans will be secured by all of the assets of the SPV.

3. Federal Reserve Board on Tuesday announced that it will establish a Primary Dealer Credit Facility, or PDCF. The facility will allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households.

4.The PDCF will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020. It will be in place for at least six months and may be extended as conditions warrant. 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 interest rate charged will be the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

Links to Full Statements

1. Commercial Paper Facility -

2.Primary Dealer Credit Facility -

What it means & impacts on Bonds & Stocks ?

This is third major set of changes done by the Federal Reserve in past five days. It continues to provide overnight repo operations with a limit of $500Bn but only $145Bn is getting used that is some where is fixing the broken market. All the major eight banks have started using the discount window that will help reduce the cost of funds when the fund rate has reduced to 0-0.25% .

Below are the credit spreads for Investment Grade and High Yield commercial papers -

Due to liquidity shortage and shutdowns by various companies there is massive spike in spread that was last seen in 2016. This is not a good sign especially when the corporates require higher cash borrowings as the regular revenue and cashflow generation takes toll . Even Apple being high cash company had a spread of 85bps when it announced shutdown of retail stores in USA.

To smoothen this liquidity issue Commercial Paper Funding Facility has been started that was last seen during financial crisis of 2008.

The second change that was announced for banks to provide collateral funding against various securities under assets held by them. This is further to increase the liquidity available to them for lending or treasury activities without selling these assets are low prices as market panic has hit there valuations.

10yr Bond Yield has reversed from 0.66% to above 1% reducing the inversion and addressing the concerns of a lot of anxious investors. S&P 500 closed 6% up on this announcement along with stimulus news where government has mentioned that it plans to send cash directly to citizens.

Our View :

Fed was taken to be in non-reactive in last 12 months but the response in these crisis has been massive and very active that has been taken well by Bond markets and Dollar index. All major tools available to address the liquidity concerns have been activated and acted upon quickly to support the larger economic system.

Though the same positive response will not be visible in equities right now given that USA coronavirus cases are increasing and there is larger shutdowns. But once the situation is contained and some reversal happens similar to China there will be all these support system to boost the reversal at much faster pace leading to quicker reversal in equities with may be new highs.

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