Fed pledges to buy unlimited bonds
Lending-market backstop tops 2008
The Federal Reserve, racing again to contain mounting economic and financial-market fallout from the coronavirus, unveiled a sweeping series of measures that pushed the 106-year-old central bank deeper into uncharted territory.
The Fed’s effort is aimed at keeping money flowing to companies, small businesses, households and cities that are facing an economic crisis that threatens to surpass the 2008-09 recession.
With restaurants, airlines, hotels, auto manufacturers and many other parts of the economy at a standstill, there’s a growing need for short-term loans to help businesses survive until people can go out again. But just as this demand for loans is growing, investors are showing little appetite to buy up all this debt, preferring instead to keep cash.
The Fed is attempting to resolve this by buying unlimited amounts of U.S. Treasurys and mortgage-backed securities, an extraordinary backstop for lending markets that goes much further than what the central bank did in
the earlier crisis. Back then, the Fed injected nearly $4 trillion into the financial system over several years. Analysts say the Fed’s effort now could dwarf that in a matter of weeks, a testament to how much pain the coronavirus is causing the economy.
“Wow, just wow,” George Rusnak, head of investment management at Wells Fargo Private Bank, said on Bloomberg Television. “Hopefully you’ll come out of this with some fiscal stimulus as well, and you’ll be set with good growth opportunities in the long run.”
In a sign, however, of just how unnerved investors are by the pandemic, the Fed’s moves failed to spark anything beyond a brief rally in stocks and corporate bonds Monday after weeks of staggering losses. Rancorous talks in Congress over a $2 trillion rescue package — and uncertainty over when any agreement might be reached — depressed shares.
The S&P 500 ended the day with a further loss of about 3 percent. Yields on 10-year U.S. Treasuries sank below 0.69% as investors digested the news before pushing back to around 0.79%.
The financial crunch is playing out all over the country. Rhode Island’s state treasurer warned that the state is likely to run out of money in “weeks.” Airlines and hotels are asking for billion-dollar loans. Companies such as Nordstrom, Kohl’s, Advanced Auto Parts and TJX, the parent company of TJ Maxx and Marshalls, are tapping their lines of credit at banks, according to S&P Global Market Intelligence.
Meanwhile, layoffs continue to mount, which could push unemployment as high as 30% in the second quarter, a level worse than during the Great Depression, warned James Bullard, president of the St. Louis Fed.
“This is not about helping Wall Street, this is about helping Main Street,” said economist Janet Yellen, a former Fed chair. “The availability of credit for households and businesses is essential to protect people from the worst possible economic effects.”
Economists are calling Fed Chairman Jerome Powell’s move to shore up credit markets in recent days as doing “whatever it takes” and “throwing the kitchen sink” at markets.
This clamor for credit is coming at a time when many investors are going to cash and selling nearly everything, including mortgage and municipal bonds that are normally viewed as safe assets. Almost overnight, it’s become harder to get loans because almost no one is buying debt.
Investors are looking to the Fed to provide even more money and support for the economy than Congress can, as happened during the financial crisis.
“It’s very likely the real stimulus is all going to come from the Fed, and it will be with minimal oversight,” said Aaron Brachman, a managing director at Washington Wealth Group.
The Fed also announced Monday that it will buy certain corporate bonds for the first time and that it will “soon” provide a “Main Street Business Lending Program.” These programs are meant to increase availability of loans to small and large businesses on top of any moves by Congress.
U.S. stock markets have now wiped out all the gains since President Donald Trump’s election in November 2016. Yet, what has really spooked Wall Street is the fact that as people abandon stocks, they aren’t running to bonds as they normally do. They are fleeing to cash.
Investors pulled a record $12.2 billion from municipal bond funds in the week ending March 18, according to Lipper, a financial data company. That was three times the previous record. It is making states and cities nervous as many anticipate needing to borrow money as their costs skyrocket and tax revenue dries up.
Last week, some municipalities saw their cost of borrowing spike while yields went to 10%, a massive jump from the less than 1% yields available earlier in March, said Emily Brock, a director at the Government Finance Officers Association.
“There’s just nobody there to buy the bonds,” Brock said. “We want the federal government to enter that market and start to buy.”
Americans also pulled a historic amount — $24 billion — in cash from ATMs and bank branches, Deutsche Bank reported, an indication of how worried people are. Prime money market funds, one of the closest equivalents to cash, lost 11% of their total assets as big institutional investors fled.
Even trading of mortgage securities, which is also considered a safe haven asset, nearly froze in recent days from panic selling. As clients called and wanted their money back, investment managers were forced to sell. This triggered a run on real estate investment trusts, said Walt Schmidt of FHN Financial, which exacerbated the selling since these companies are typically levered, meaning they are borrowing to invest $5 for every $1 an investor puts in the fund.
Credit markets improved slightly Monday after the Fed’s latest action, but investors remain hesitant to invest until Congress gives companies and households a cash injection to help pay their bills.
“The Fed has done historical amounts to support for the financial markets, but really, the next step has to be on the fiscal side,” said Neal Epstein, a senior credit officer at Moody’s.
The Fed has acted quickly to keep money flowing in the economy. Last week, the central bank slashed interest rates to zero and gave banks access to loans at a record-low 0.25%. The Fed also said it would make at least $700 billion in new bond purchases, but it is indicating a willingness to do a lot more than that.
This week, the Fed plans to purchase $75 billion worth of Treasury securities every day and $50 billion a day of mortgage-backed securities. Some of the purchases will be commercial mortgage-backed securities, an effort to ease the strain as malls and other retail hubs look increasingly at the risk of bankruptcy.
“The Fed is just going to keep trying things until something works,” said Eric Stein, vice president of Eaton Vance Management and former staffer on the New York Fed’s markets desk in 2007-08.
In addition to buying more bonds, a policy known as “quantitative easing,” the Fed is relaunching programs to support corporate and household debt. One is the Term Asset-Backed Securities Loan Facility, which helps the market for student loans, auto loans, credit card loans and loans backed by the Small Business Administration.
Information for this article was contributed by Heather Long of The Washington Post; by Christopher Condon, Craig Torres, Matthew Boesler, Michael McKee, Vince Golle, Jeff Kearns, Benjamin Purvis, Steve Matthews, Saleha Mohsin and Anna Edgerton of Bloomberg News; and by Christopher Rugaber, Paul Wiseman and Martin Crutsinger of The Associated Press.