Jawboning alone whipped the markets into froth. So maybe enough is enough, and let taxpayers have their money back as planned?
By Wolf Richter for WOLF STREET.
The Special Purpose Vehicles (SPVs) that the Fed set up earlier this year, and that were authorized by Congress and funded initially with equity contributions from the US Treasury, and that form part of the alphabet soup of bailout programs for investors in corporate bonds, corporate bond ETFs, municipal bonds, commercial paper, money market instruments, etc., have expiration dates written into their term sheets. In July, the initial expiration date of the SPVs – September 30 – was extended to December 31.
On Thursday, Treasury Secretary Steven Mnuchin said in a letter to the Fed that he would request an additional extension of the expiration dates for only four SPVs but let the others five — the PMCCF, SMCCF, MLF, MSLP, and TALF – expire as planned on December 31.
And he asked the Fed to send the $455 billion in taxpayer money that the Treasury had provided to fund the equity portion of those SPVs back to the Treasury so that it can be re-allocated by Congress for Covid-related fiscal relief.
Mnuchin cited a slew of financial-market metrics as reasons for not extending the expiration dates. These reasons can be summarized this way: The hype and jawboning worked wonderfully in whipping the financial markets into frenzy and bail everyone out that we wanted to bail out, and we didn’t actually have to spend much of this money since jawboning and hype alone did the job.
So here are the financial-market metrics he cited, and they all document that credit markets are frothing at the mouth, as if it were the Best of Times and not in the middle of a Pandemic and crisis:
- “The spread on investment-grade bonds has fallen from a peak of 4.06% above U.S. Treasury bonds to 1.40% today.”
- High-yield [corporate junk-rated] borrowers “have seen their spread reduced from 10.78% to 4.94%.”
- For AAA-rated municipal general obligation bonds, the spread “has fallen from 2.09% above to 0.07% below Treasury bonds.”
- For A-rated municipal bonds, the spread has fallen “from 2.37% to 0.26%.”
- “In the asset-backed securities market, AAA-rated credit-card secured notes now trade at a spread of 0.30% over the swap rate compared to their crisis level of 2.50%, while the spread on the A-rated tranche has fallen from 4.50% to 1.20%.”
- “Market spreads on bonds secured by prime auto loans rated AAA and A that reached peaks of 3.25% and 5.50% respectively are now only 0.05% above their pre-crisis values of 0.2% and 0.7%.”
- “During September and October 2020, states and cities were able to borrow $111 billion (38% more than over the same period last year), while total asset-backed bond issuance of $789 billion exceeded its 2019 same-period level by 63%.”
- Over the last two months, corporate asset-backed securities issuance totaled $1.08 trillion, similar to last year’s $1.13 trillion.
- Over the last two months, non-government-agency asset-backed securities issuance totaled $155 billion, similar to last year’s $157 billion.
- “October 2020 saw the highest monthly volumes of new bonds in both the municipal market ($64 billion) and the asset-backed markets ($421 billion) in more than a year.
- “The corporate bond market continued its monthly new issue pace of $500-$600 billion.”
- “The liquidity and capital position of U.S. banks ensures that they can fulfill the financing requirements of their customers. In the most recent survey by the National Federation of Independent Business, only 2% of small and medium-size firms reported that all their borrowing needs were not satisfied.”
So “in an abundance of caution,” Mnuchin requested that the Fed Board of Governors approve the extension of the expiration dates by an additional 90 days of only four SPVs – two that required funding from the Treasury (the CPFF and MMLF) and two that did not require funding from the Treasury (PDCF and PPPLF).
He will let the remaining five SPVs – the PMCCF, SMCCF, MLF, MSLP, and TALF – expire as per their term sheets on December 31.
And he requested that the Fed return the unused $455 billion of taxpayer funds to the Treasury so that it can be used for Covid-related fiscal relief.
None of these expiring SPVs were utilized much. For example, the PMCCF and the SMCCF, which the Fed combined into the CCF, purchased only $13 billion of corporate bonds and bond ETFs. The Fed stopped buying ETFs in July and has been buying only a smattering of corporate bonds since then.
But the Fed – and very eagerly, the financial media – had originally hyped and promoted the CCF as “$750 billion” in Fed purchases of corporate bonds, bond ETFs, including junk bonds. This jawboning of the markets led to the most blistering credit-market boom and bubble, including in junk bonds, that the US has ever seen, just on the announcement of the SPVs, and long before the Fed ever bought the first ETF, as everyone and their dog was trying to front-run the Fed.
This is the glorious effect of jawboning. Mnuchin, in his letter, explicitly acknowledged that this jawboning had performed the miracles he listed and had ignited this chase for yield. And so maybe enough is enough, and let taxpayers have their money back as planned?
Someone always has to buy the ballooning US national debt – and it’s not just the Fed. But the share of foreign holders is waning. Read… Who Bought the Monstrous $4.2 Trillion Added to the Incredibly Spiking US National Debt in 12 Months? Everyone but China
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