In summary, these facilities were really meant to restore market function, liquidity, and more appropriate pricing of credit risk when it was dislocated earlier in the year. After months of steady improvement in market conditions, they are no longer needed at this point.
Listen to On the Minds of Investors
In a somewhat surprising move, US Treasury Secretary Mnuchin announced1 that the PMCCF, SMCCF, MLF, MSLP and TALF2 will expire at the end of the year and that unused funds be returned to the Treasury. This may have come as a surprise given the expectation that the Federal Reserve (Fed) would extend the corporate credit facilities at least until March or when the pandemic was further in the rear-view. At the very least, this removes a key backstop for corporate credit markets; however, the market reaction has been quite muted. This begs the question: should investors be concerned about these facilities expiring at the end of the year?
In short, we don’t think this will cause a significant repricing in credit markets for a few reasons:
- First, most of the spread tightening in credit markets occurred after the Fed announced the credit facilities on March 23rd, and before the facilities were actually up and running. With the market now aware of the removal of this backstop, it seems investors can look past December 31st and to the point of a vaccine sometime in 2H21.
- Second, the Fed could approach the new administration to re-establish these facilities in January. Moreover, with the very recent news of President-elect Biden selecting Janet Yellen as the new Treasury Secretary (if approved by the Senate), it’s likely she would agree to an extension.
- Third, as highlighted in the chart below, all the facilities have seen very little activity relative to overall lending capacity.
In summary, these facilities were really meant to restore market function, liquidity and more appropriate pricing of credit risk when it was dislocated earlier in the year. After months of steady improvement in market conditions, they are no longer needed at this point.
Looking ahead to the December meeting, investors might expect the Fed will try and do more quantitative easing (QE) as a result of the Treasury action. However, lending facilities are not QE, rather they are established to smooth out unusual and exigent market-functioning glitches. With this in mind, we expect little to no policy changes at the next meeting.
Federal Reserve's credit facilities
1 Official letter from Secretary Steven T. Mnuchin on the Status of Facilities Authorized Under Section 13(3) of the Federal Reserve Act can be found here: https://home.treasury.gov/news/press-releases/sm1190
2 The Federal Reserve’s credit facilities include the Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF), Term Asset-Backed Securities Loan Facility (TALF), Secondary Market Corporate Credit Facility (SMCCF), Primary Market Corporate Credit Facility (PMCCF), Municipal Liquidity Facility (MLF), Paycheck Protection Program Lending Facility (PPLF) 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 are as of November 23, 2020.