As the Coronavirus Aid, Relief, and Economic Security (CARES) Act emerged from on high in the Senate, it became clear to me what this meant for fixed income investors. The tidal wave of funding required for America to withstand the economic downturn would be absorbed through a myriad of government and Federal Reserve (Fed) programs, while private bond buyers will scramble to get in on the action as debt is moved “off balance sheet”. The bill provides direct loans to small businesses through the Small Business Lending Facility, and arms the Treasury to fund the Fed with another USD500 billion to provide liquidity to “businesses, states and municipalities.” Excluding the approximate USD50 billion that will be directed toward particularly impacted industries, the rest goes to the Fed to purchases obligations directly or through the secondary market. Using the Fed’s usual 10x leverage, this gives them around USD4.5 trillion in buying power. Wow! And that’s in addition to the USD30 billion (USD300 billion with leverage) that was announced on Monday.

This is a considerable way from where the Fed started on Sunday March 15^th with rate cuts to zero, USD700 billion in Quantitative Easing (QE), foreign dollar swap lines and a reduction in the required reserve ratio. That was about ensuring some functionality to the short term funding markets. As the pressure increased, the Fed added a commercial paper funding facility (CPFF), primary dealer credit facility (PDCF), money market liquidity facility (MMLF) and finally on Monday March 23^rd – unlimited QE, a primary and secondary corporate credit facility (PMCCF, SMCCF), a term asset-backed loan facility (TALF), expansion of MMLF to include bank CDs and muni VRDNs and a main street lending program (MSLP). Suddenly, most of the investment grade bond markets were operating with some degree of normalcy. This was just the beginning.

The CARES Act, when combined with unlimited QE, allows the Federal Reserve to control the cost of funding across all levels of government and corporate America. Pause, and reflect on that for a moment. It’s no longer up to us (the universe of fixed income investors) to price the cost of credit. With unlimited QE, the Fed can fix the cost of Treasury funding from 0% in Treasury bills to 0.5% in 10-year US Treasuries if that is what is needed for the US to be able to afford trillions in additional issuance. They can also buy agency mortgages so that Fannie 1.5% funding is a reality for home buyers. How about buying enough investment grade corporates so that the average funding cost of corporate America is 2%? If so, the state and municipal governments will feel the pressure and likely need a QE program of their own. Perhaps they will need a cost of funding that is lesser than the Federal government. I expect all of these things to play out.

While so many of us grew up in markets that were only lightly influenced (certainly in retrospect) by Federal Reserve policy, we must accept this change. This isn’t about analyzing economic growth and inflation data, supply and demand and market flows. That was yesterday. This is about the greatest mobilization of sweeping policy that any of us have ever witnessed. It’s designed to engineer a soft landing through the crisis and a recovery afterward. Hopefully, these policies will prove to be temporary and will be withdrawn as the country recovers (fingers crossed – sooner than later). For now, I applaud policy makers at the Federal Reserve, the Treasury and the Capitol for their rapid response. We’re all in this together.