- Fed steps into commercial paper market to stabilize corporate short-term lending.
- Congress and the President’s administration are working on fiscal stimulus package.
- During turbulent times, it’s important to stay diversified and keep in touch with your financial professional to help keep you on track.
Monday was the worst day for the Dow Jones Industrial Average since Black Monday in 1987. While the Federal Reserve cut rates to zero over the weekend, investors know that the financial market impact caused by COVID-19 can’t be solved by monetary policy alone. The Fed is trying its best to support market liquidity and make sure financial markets and businesses can operate smoothly and access cash when they need it. The Fed acted again today to provide even more support for corporations and at President Trump’s news conference, Treasury Secretary Steven Mnuchin briefed the press that he is working with Congress on a fiscal stimulus package.
The Federal Reserve received approval from Treasury Secretary Mnuchin to begin buying unsecured and asset-backed securities from a select list of eligible companies. As market volatility has picked up and companies have strived to maintain liquidity for ongoing operations, some of the typically more liquid parts of the market, such as commercial paper and off-the run Treasurys, have experienced lessened liquidity and increased transaction costs in the form of higher bid/ask spreads.
Corporations typically sell short-term commercial paper to finance their ongoing operations. Typical buyers of commercial paper are large money market funds, mutual funds, investment firms, and banks. As buyers of commercial paper have had less cash inflows to invest over the past week, market liquidity has been lessened. Therefore, corporations have resorted to drawing down their emergency credit lines to shore up their temporary cash positions which are needed in a period when business traffic may slow. The number of major corporations drawing down credit lines has placed undue pressure on banks during this period.
The Fed will be purchasing commercial paper to help support this market and allow corporations to maintain ample access to credit without increasing the risk of making the banking system more vulnerable. Such support in the commercial paper market hasn’t been seen since it was last needed in 2008. Separately, Mnuchin said in a press conference this morning that the Trump administration backs a plan to send checks directly to Americans and they are looking to get them out quickly – in a matter of weeks. Democrats have also proposed similar plans, so there is a lot of hope that a bipartisan bill can be approved soon.
Politicians are looking for direct ways to help small businesses and workers impacted by the virus. The package would also help airlines and hotels. We will provide more details on this as the bill is hopefully passed. Equity investors seem to be responding favorably to the news.
Markets continue to move quickly in both directions as new reports about the virus and stimulus packages emerge. Stock markets are pricing in a lot of bad news already. These are challenging times, but your financial professional can help you stay on course. It is important to review your financial goals and objectives periodically and focus on your long-term goals.
This report is created by Cetera Investment Management LLC.
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