To ensure an optimal and secure experience, please upgrade to the latest version of your browser.
This morning, the Fed Reserve (the”Fed”) announced extensive new steps to support financial markets and the real economy.
Their quantitative easing (QE) program announced last Sunday will now be unlimited instead of the previously stated $700bn. In fact, the Fed is set to purchase as much as $250bn of mortgage-backed securities (MBS) this week alone.
The likely intended result will be to ensure yields remain low even as the Treasury readies its expansionary fiscal program (which will likely result in greater Treasury bond issuance).
The Fed will purchase up to $100bn of corporate bonds with at least one investment grade rating and a maturity of less than five years through the Secondary Market Corporate Credit Facility (SMCCF). The Fed will also lend $100bn for up to 4-year terms by directly lending to investment grade corporations through the Primary Market Corporate Credit Facility (PMCFF).
The Fed will look to avoid lending to companies who are receiving direct aid from the Treasury (such as the airline industry). Each of these programs will be supported by $10bn equity commitments from the US Treasury’s Exchange Stabilization Fund (ESF).
Elsewhere, in a return to its 2008-era playbook, the Fed will re-introduce the Term Asset-Backed Securities Loan Facility (TALF), a facility in which the Fed will purchase up to $100bn of consumer, equipment, and auto asset backed securities (ABS).
At $100bn each, both programs are small given the size of the corporate and ABS markets. If necessary, we believe they can be easily expanded. We anticipate an improvement in the functioning of the market and a return to normalcy over time as these types of policy actions are implemented.
The Fed will likely need Congress to pass the third coronavirus response bill before it can execute its corporate programs. This is because the latest version of the bill permits the Fed to create vehicles to purchase corporate and municipal debt, and it injects $500bn into the Exchange Stabilization Fund (ESF); which can be used to make direct corporate loans or to provide the equity credit enhancement necessary for the facilities to work.
While it is unclear how much in direct aid the Treasury plans to provide, the size of the ESF injection provides ample capacity for the Fed to expand its own programs further if necessary. We expect the bill is likely to be passed and signed into law shortly.
We take this as a signal that the Fed will do whatever it takes to provide adequate support to the economy through the coronavirus crisis.
We are analyzing the effects of the coronavirus on the US and global economy. You can check here for an up-to-date summary of fiscal and monetary policy responses. In addition, we have recently published analysis of the Gross Domestic Product (GDP) impact on China and will be sharing global GDP scenarios.
This is an unprecedented time for the global economy and the pace and magnitude of the coordinated policy response is going to go well beyond even that we saw during the 2008 crisis. Despite the fact that a near-term reduction in GDP is likely to be in double digit territory, in time, we expect the unprecedented monetary and fiscal policy response to lay the groundwork for an eventual rebound. This should help to limit the extent of any long-term damage to the economy.
All investments involve risk, including the possible loss of principal. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Insight Investment advisory services in North America are provided through two different investment advisers registered with the Securities and Exchange Commission (SEC), using the brand Insight Investment: Insight North America LLC (INA) and Insight Investment International Limited (IIIL). The North American investment advisers are associated with other global investment managers that also (individually and collectively) use the corporate brand Insight Investment and may be referred to as “Insight” or “Insight Investment.”
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Investment Adviser, Inc., Insight and BNY Mellon Securities Corporation are companies of BNY Mellon. © 2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.