• 7 days Stocks Tumble After Moderna Chief Warns Existing Vaccines Could Be Less Effectiv
  • 8 days The EU Is Pushing Two Massive Digital Laws To Tame Big Tech
  • 11 days U.S.-China Trade War Has Under Biden
  • 13 days Visa, Mastercard Slump Amid Covid Worries, Regulatory Outlook
  • 14 days 3 Biotech Stocks Wall Street Loves This Quarter
  • 18 days Fintech Goes “Green”, Joining $30T ESG Boom
  • 19 days U.S. Cargo Theft Spikes Amid Huge Supply Chain Snarl Ups
  • 20 days Buybacks Are Back, But New Taxes Could Dull the Party
  • 22 days Don’t Be Fooled By Musk’s Twitter Performance
  • 27 days 3 Healthcare Sector Stocks to Watch Right Now
  • 28 days More Trouble Ahead for Supply Chain as Hackers Descend
  • 29 days Saudi Arabia To Invest $64 Billion Into Becoming A New Global Cinema Hub
  • 32 days The Cryptic Squid Strikes, Netting Scammers Nearly $4M
  • 32 days October Jobs Impress but Inflation Threatens Recovery
  • 34 days Another Round of ‘Meme’ Stocks Coming Our Way?
  • 34 days 2021’s Black Friday Bummer
  • 36 days Buy-Now-Pay-Later Is A Huge Threat to Credit Cards
  • 39 days Microsoft Passes Apple As World’s Most Valuable Company Amid Stellar Earnings
  • 40 days 3 IPOs from Big to Small Coming Our Way
  • 41 days Robinhood Investors Balk at ‘Meme’ Growth
The Fed’s $3 Trillion Headache

The Fed’s $3 Trillion Headache

On Wednesday, the Federal Reserve…

Markets Unfazed As Inflation Hits 13-Year High

Markets Unfazed As Inflation Hits 13-Year High

Wall Street stocks have mostly…

Don’t Be Fooled By Musk’s Twitter Performance

Don’t Be Fooled By Musk’s Twitter Performance

Earlier this month, Musk informed…

  1. Home
  2. Markets
  3. Economy

Fed Ends Corporate Credit Emergency Lending Program

Fed Ends Corporate Credit Emergency Lending Program

On Wednesday, the Federal Reserve unveiled plans to begin selling its corporate debt in the Secondary Market Corporate Credit Facility ("SMCCF"), an emergency lending facility that helped support credit markets during the pandemic crisis.

The move completes the central bank’s move away from market support programs it launched last year as part of a Covid-19 relief program. Five of those emergency facilities expired in late 2020.

The Fed says that as corporate bond spreads widen, the SMCCF portfolio sales will occur gradually and orderly and will aim to minimize the potential for any adverse impact on the bond markets including daily liquidity and trading conditions for ETFs and corporate bonds.

Corporate bonds appear to have taken the news in stride, with the largest credit ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA:LQD) slightly down. The U.S. weekly fund flows insight report by Refinitiv Lipper ending June 2nd, 2021, shows that LQD saw outflows of $605 million during the week. LQD has $40.4B in assets under management (AUM).

Which is perhaps to be expected considering that the Fed’s move to unwind its corporate-bond portfolio is relatively minor compared to any future quantitative easing (QE) measures it might unveil in the future. As per the central bank’s latest report, the Fed owned $13.8 billion in bonds and bond ETFs, a minuscule percentage of the overall corporate bond market of more than $10 trillion, according to the Securities Industry and Financial Markets Association.

Fed’s holdings make up between 0.5% and 7.2% of each fund’s market capitalization.

Surprise move

Wall Street has taken divergent views of the Fed’s latest mini-QE.

Bank of America strategists have raised concerns about the move, pointing at the Fed’s checkered track record when it comes to QE programs.

“Clearly the Fed has little in terms of a successful track record in selling assets and also by far most of the time merely adjusts policy to market expectations. This is why the Fed’s announcement today--which was 100% surprising--to begin gradually selling their portfolio of corporate debt acquired during the liquidity crisis last year is very negative for risk assets. Clearly the Fed feels sufficiently emboldened by the scarcity of credit assets in the front end of the curve and high valuations to be comfortable testing markets in this way,” the bank has said.

Citigroup ETF strategists have adopted a more positive stance, labeling the Fed’s “timing a bit surprising, but not unreasonable.” Citigroup had originally estimated that it would take years to “fully unwind” the emergency portfolio; however, the bank says that “a more speedy unwind of ETFs does help ensure a profit is returned to the Treasury, which is definitely a bonus from the facility.’’

Citigroup does note that “Messaging and concerns of further monetary policy tightening could make investors somewhat nervous, hence some modest softness in credit ETFs today.”

Although the Fed has in the past been clear that its QE policy will only change when the data on unemployment and inflation changes, pressure from this policy is gradually building in the banking sector, as well as the treasury and repo markets. Goldman Sachs, JPMorgan,  Citi and Morgan Stanley have talked about the stress being put upon their institutions by the more than $3 trillion of bank reserves created by the Fed in 2020.

The Fed has continued buying bonds at a tepid pace of $120 billion a month with Fed chairman Jerome Powell maintaining it is still too early to even talk about tapering. Unfortunately, this wall of deposited liquidity means that the Wall Street banks must issue billions in bonds and preferred equity in a bid to try and stay within their supplementary leverage ratios (SLRs). 

The March 2021 expiration of the exemption on U.S. securities and deposits held at Fed banks in banks’ total leverage exposure has only made that exercise harder.

By Alex Kimani for Safehaven.com

Back to homepage

Leave a comment

Leave a comment