Fed lends a hand to businesses Fed lends a hand to businesses http://www.federatedinvestors.com/texPool/static/images/texpool/texpool-logo-amp.png http://www.federatedinvestors.com/texPool/daf\images\insights\article\NYC-small.jpg April 24 2020 March 18 2020

Fed lends a hand to businesses

Primary dealers and the short end of the commercial paper market are the latest to get support.
Published March 18 2020

The Federal Reserve yesterday addressed two key aspects of the financial markets that have come under strain due to the impact of the coronavirus, first saying it will buy commercial paper directly from the marketplace to support broad primary market funding needs. This was followed by a later announcement offering overnight-to-90 day term loans to its primary dealers. The Fed refers to these programs as the Commercial Paper Funding Facility (CPFF) and the Primary Dealer Credit Facility (PDCF), respectively.

While these moves are responsive to current market situations, liquidity has not been a problem along the commercial paper curve or with primary dealers. Both facilities have not yet been implemented, but we believe they will give participants in the short end of the markets confidence their needs will be met.

The CPFF is designed to help reduce primary issuance liquidity stress for high-quality, short-term issuers. It should help facilitate the financing needs of corporations, which should lead to a reduction of bid/ask spreads and restored confidence for these issuers.

The PDCF allows 24 primary dealers—all large financial institutions who already serve as exclusive counterparties to the Fed trading in financial markets—to get overnight and term funding collateralized by investment-grade debt such as commercial paper, municipal bonds and some equity securities. These can have maturities up to 90 days at an interest rate charged equal to the discount rate—currently 0.25%. This program should help free-up dealer balance sheets and increase their participation in the secondary markets. It will start Friday.

In the case of the CPFF, the issue was not liquidity, but of trader bid and ask offers not finding common ground. Investors want to keep maturities short because of uncertainty about their clients' liquidity needs; issuers would rather fund themselves further out the curve to reduce their rollover risk in the current environment. The CPFF helps the two sides meet in between. With the financing needs of the commercial paper issuers met, bank balance sheets should be freed up to provide active markets for secondary commercial paper trades to help facilitate two-way market flow and reduce bid/ask spreads.

Tags Coronavirus . Liquidity . Monetary Policy . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

Federated Investment Management Company