The Federal Reserve keeps at it: New supportive actions this week - J.P. Morgan Asset Management
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The Federal Reserve keeps at it: New supportive actions this week

Contributor Kyongsoo Noh

The Federal Reserve (Fed) on Monday announced new programs, with total buying power of USD300 billion, and enhanced existing ones to help support the economy and guide the markets back to proper functioning. The new programs are directed at the primary and credit markets, in particular. Below is a summary of actions the Fed announced Monday morning.

Establishing the Primary Market Corporate Credit Facility (PMCCF)

The Fed will establish the PMCCF as a special purpose vehicle (SPV) funded by a USD10 billion equity investment by the Treasury Department’s Exchange Stability Fund (ESF) and USD90 billion of loans from the Federal Reserve Bank of New York (FRBNY).

  • The PMCCF will purchase eligible bonds in the primary market from and make loans to eligible issuers; maturities of bonds or loans will be four years or less in maturity.
  • Issuers must be investment grade; issuers that expect to receive direct financial assistance from the U.S. government are not eligible.
  • There are limits per issuer, based on ratings and bonds outstanding.
  • The interest rates on the bonds and loans will be informed by market conditions; the bonds or loans are callable by the issuer at par at any time.
  • The program will terminate September 30, 2020, unless the Fed decides to extend it.
Establishing the Secondary Market Corporate Credit Facility (SMCCF)

The Fed will establish the SMCCF as a special purpose vehicle (SPV) funded by a USD10 billion equity investment by the Treasury Department’s Exchange Stability Fund (ESF) and USD90 billion of loans from the FRBNY.

  • The SMCCF will purchase in the secondary market investment-grade corporate bonds maturing in five years or less.
  • The SMCCF may also buy U.S.-listed exchange traded funds (ETFs), whose objective would be to provide broad exposure to U.S. investment-grade corporate bonds.
  • There are limits per issuer based on bonds outstanding, and per ETF based on shares outstanding.
  • Purchase prices will be at fair market value, based on secondary market conditions.
  • The program will terminate September 30, 2020, unless the Fed decides to extend it.
Establishing the Term Asset-Backed Securities Loan Facility (TALF)

The Fed will establish the TALF as a special purpose vehicle (SPV) funded by a USD10 billion equity investment by the Treasury’s Department’s Exchange Stability Fund (ESF) and USD90 billion of loans from the FRBNY.

  • The program will make loans to purchase AAA/Aaa or A-1+/P-1/F1+ rated (or their equivalents) asset-backed securities (ABS), backed by newly originated collateral; TALF loans will have a maximum maturity of three years and will only be used to finance ABS issued in the primary market.
  • Eligible collateral backing the ABS includes auto loans and leases, student loans, credit card receivables, equipment loans, floorplan loans, insurance premium loans, certain loans guaranteed by the Small Business Administration (SBA) and servicing advance receivables.
  • Interest rates will be 2-year swaps plus 100 basis points (bps), or 3-year swaps plus 100bps, depending on the average lives of the ABS; TALF loans can be prepaid at par at any time as collateral pays down.
  • The program will terminate on September 30, 2020, unless the Fed extends it.
Expanding the Money Market Fund Liquidity Facility (MMLF)
  • The Fed expanded eligible collateral to include negotiable certificates of deposit by U.S. issuers rated A-1/P-1/F1.
  • This comes in addition to the program’s expansion last week, when the Fed announced it would include municipal money market funds and eligible municipal investments.

- Eligible municipal investments include 12 month and shorter maturity municipal bonds rated at least SP1/MIG1/F1 or AA or their equivalents

- Also eligible are variable rate demand notes (VRDN) that give the holder the ability to tender within 12 months and are rated at least SP1/VMIG1/F1 or AA or their equivalents.

Reducing pricing on the Commercial Paper Funding Facility (CPFF)
  • The Fed reduced pricing on A-1/P-1/F1 rated commercial paper (CP) to 3-month overnight indexed swaps (OIS) plus 110bps.
  • Pricing was announced on A-2/P-2/F2 rated CP to be 3-month OIS plus 200bps.
  • However, A-2/P-2/F2 is only eligible if the issuer was rated A-1/P-1/F1 on March 17, 2020.

The PMCCF, TALF and CPFF target the primary markets, which means providing liquidity for issuers. The SMCCF and the MMLF target the secondary markets, which means providing liquidity for funds and portfolios. The PMCCF, SMCCF and TALF were established under the authority of Section 13(3) of the Federal Reserve Act, which only needs the approval of the Treasury Secretary. Congressional approval was not required for these three programs at these sizes. The total buying power of these three programs is USD300 billion. These Fed actions on Monday do not rule out the setting up of even larger or broader programs directed at normalizing market function in the coming days. The current bill still being negotiated in the U.S. Senate includes a USD425 billion addition to the ESF, which could be used as equity to support USD4.25 trillion of asset purchases using loans from the Fed.

It will take time for existing programs to work, but we believe that the Fed will keep attacking the lack of market liquidity until conditions improve.

For additional questions, please contact your J.P. Morgan Global Liquidity Client Advisor.

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