JPAM_logo
  • Funds

    Fund Listing

    • Fund Explorer
    • Fund Distribution
    • Fund Documents

    Featured Funds

    • Income Fund
    • Multi Income Fund
    • Future Transition Multi-Asset Fund
    • Global Equity Solutions
    • China Income and Growth Solutions
  • Insights

    Market Insights

    • Market Insights Overview
    • Guide to the Markets
    • Weekly Market Recap
    • On the Minds of Investors
    • Guide to China
    • Multimedia

    Portfolio Insights

    • Portfolio Insights Overview
    • Long-Term Capital Market Assumptions
    • Global Asset Allocation Views
    • Global Fixed Income Views

    Retirement Insights

    • Retirement Insights Overview
    • Principles for a Successful Retirement
    • Building Better Retirement Portfolios
    • Are you letting volatility derail your retirement plan?
  • Investment Ideas
    • Managing Volatility
    • Growth Strategy
    • Income Strategy
    • Retirement and long-term investing
  • Resources
    • Announcements
    • Forms & Literature
    • Investment Glossary
    • Library
    • Insights App
  • About Us
    • Awards
  • Partner With Us
Skip to main content
  • Language
    • English
    • 中文/ Chinese
  • Role
  • Country
  • Search
    Search
    Menu
    1. What does the end of the Fed’s credit facilities mean?

    • LinkedIn Twitter Facebook Line

    On the Minds of Investors

    24/11/2020

    Kerry Craig

    What does the end of the Fed’s credit facilities mean?

    In a rare event, the U.S. Treasury and the U.S. Federal Reserve (the Fed) have had a very public disagreement about the extension of several of the credit facilities used to backstop credit markets and increase financial stability. The risk is that an important source of financial market support is removed at a time when the economy is facing increasing downside risks from fading fiscal support and weaker levels of economic activity associated with higher COVID-19 case numbers.

    The facilities in question are those which are funded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the primary and secondary corporate credit facility, the municipal lending facility, term asset-backed securities loan facility and the main street lending facility. Only these programs will be removed come year end and were initially designed to extend cheap loans to small and medium size companies, municipalities as well as households. The other facilities, which are designed to ensure ample market liquidity, such as the commercial paper funding facility, have been extended until the end of March 2021.

    The CARES Act funding allowed for USD 454billion (bn), which the Fed could lever up to originate new loans, purchase assets and protect itself from losses. The ability of the Fed to lever up this initial funding meant that the theoretical limits of the facilities were much higher. USD 195bn of the initial funding was allocated to the credit facilities, which are now ending and most of the funds were used in the primary and secondary corporate credit facilities and the main street lending facility. The Treasury is asking for the unused portion of the funds, but the exact amount is unknown, as there are still issues regarding current outstanding loans that the facilities have made.

    The rationale is that these programs have done their job, as indicated by healthier markets and their limited use. Exhibit 1 shows that the actual take-up of many of these facilities was far lower than the maximum potential. Meanwhile, the bond market in the U.S. is in much better shape than when these facilities were first introduced and the medium-term outlook for the economy is superior to nine months ago. However, the sentiment effect of having the backstop of the two corporate credit facilities was a powerful driver of that improvement. The spread tightening that occurred in March came after the announcement of the facilities and well before they were actually applied. The consequences of not having that sentiment support could be dire, should the market experience another crisis.

    As central banks’ palettes of policy tools have expanded since the global financial crisis and more recently the COVID-19 crisis, they have been unwilling to give up these new measures. The Fed is no different, preferring to retain all the options at its disposal, even if they are unused, to ensure stability in financial markets and achieve employment and inflation mandates.

    EXHIBIT 1: UNITED STATES: MONETARY POLICY

    Source: Bloomberg Finance L.P., FactSet, U.S. Federal Reserve, J.P. Morgan Asset Management. The Federal Reserve’s credit facilities include the Commercial Paper Funding Facility (CPFF), Primary Dealer Credit Facility (PDCF), Paycheck Protection Program Lending Facility (PPLF), Corporate Credit Facility (CCF), Municipal Liquidity Facility (MLF), Money Market Mutual Fund Liquidity Facility (MMLF), Term Asset-Backed Securities Loan Facility (TALF) and the Main Street Lending Facilities, which include the Main Street Expanded Loan Facility (MSELF), Main Street New Loan Facility (MSNLF) and the Main Street Priority Loan Facility (MSPLF).
    Data reflect most recently available as of 23/11/20.

    Investment implications

    The investment implications of ending the lending facilities may seem limited, given that many of these facilities were only used lightly, but the most successful programs are often the ones that don’t need to be used. The fact that they exist is enough of a signal to send markets on the right path. It will be the sentiment effect at a time of U.S. economic strain that could have the greatest short-term impact on markets. In the medium term, things are less worrying.

    The current U.S. administration will come to an end on the 20th of January, at which point the new administration and U.S. Treasury Secretary could reestablish the programs. There are funds available via the Exchange Stabilization Fund, which is used to support the continuing U.S. Treasury – Federal Reserve facilities into next year. The amount available through the ESF is around USD 70bn, which may limit the sentiment impact from the perspective that this would look like reduced firepower. Meanwhile, the return of the funds from the Fed to the Treasury means that there is more money in the pot which Congress could allocate elsewhere or potentially increase the size of any stimulus package in the new year.

    What does this all mean for the Fed? The Fed has hinted heavily that a change to the current policy setting is coming at its December meeting and the decision not to renew facilities may add a little more downside risk to the Fed’s view, but does not inherently create a greater impetus to act.

    For markets, particularly U.S. credit markets, the worst appears to be behind them. The improving economic outlook expected from the second half of next year and the potential upside risk from an earlier arrival of a COVID-19 vaccine create a supportive outlook for U.S. corporate debt. The expectation that government bond yields will remain low as inflation rates remain low means that investors will remain attracted to the relatively higher yields on offer from investment-grade and high yield bonds.  

     

    0903c02a82a8a558

    FEATURED FUNDS

    Asian Total Return Bond Fund

    READ MORE

    The Market Insights program provides comprehensive data and commentary on global markets without reference to products. Designed as a tool to help clients understand the markets and support investment decision-making, the program explores the implications of current economic data and changing market conditions. 

    For the purposes of MiFID II, the JPM Market Insights and Portfolio Insights programs are marketing communications and are not in scope for any MiFID II / MiFIR requirements specifically related to investment research. Furthermore, the J.P. Morgan Asset Management Market Insights and Portfolio Insights programs, as non-independent research, have not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor are they subject to any prohibition on dealing ahead of the dissemination of investment research.

    This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

    J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

    To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy.

    This communication is issued by the following entities:

    In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be. In Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For all other markets in APAC, to intended recipients only.

    For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.

    Copyright 2022 JPMorgan Chase & Co. All rights reserved.

    J.P. Morgan Asset Management

    • Terms of Use
    • Privacy Statement
    • Cookies Policy
    • Investment Stewardship
    • Fund Notes
    • Offering Document(s)
    • Forms & Literature
    • Guide to Using This Website
    • Sitemap
    J.P. Morgan

    • J.P. Morgan
    • JPMorgan Chase
    • Chase

    Important: This area of the website is intended only for distributors of JPMorgan Funds (Asia) Limited. Information is not intended for retail or public distribution.

    Investment involves risk. Past performance is not indicative of future performance. In particular, funds which are invested in emerging markets and smaller companies may involve a higher degree of risk and are usually more sensitive to price movements. Investors should carefully read and consider the fund offering document(s), which contain details on investment objectives, risk factors, charges and expenses of the fund, before making any investment decisions. Information in this website does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service, nor a distribution of information for any such purpose. Informational sources are considered reliable but you should conduct your own verification of information contained herein. The above information has not been reviewed by the SFC, issued by JPMorgan Funds (Asia) Limited.

    Copyright 2022 JPMorgan Funds (Asia) Limited. All rights reserved.