- Markets wait for Washington to produce a third virus-relief bill
- Fed announces two new direct loan programs that should help alleviate funding stressÂ
- Stocks partially recover as Washington formulates a response to the crisis
Markets wait for Washington to produce a third virus-relief bill — The Senate today is expected to pass the phase-two virus-relief bill that the House originally passed last Friday night. The House on Monday then approved a technical corrections bill with some minor concessions to Senate Republicans. The House virus-relief bill includes free virus testing, two weeks of paid sick leave, enhanced job benefits, increased food aid, and higher funding for Medicaid benefits.
Meanwhile, Senate Republicans and the White House are working on a phase-three virus relief bill that could top $1 trillion. Senate Majority Leader McConnell said that the Senate will not leave for a recess until they get a bill passed. The White House is discussing a plan as large as $1.2 trillion that includes such items as direct cash payments to Americans on a means-tested basis, tax deferrals, $300 billion in small business loans, $200 billion in stabilization funds, and a possible second round of checks to Americans, according to reporting by Bloomberg News.
Mr. McConnell said that Republicans and the White House first want to coalesce around a common plan and then bring Senate Democrats into negotiations for a bipartisan plan since 60 votes will be needed to avoid a filibuster. However, Democrats suspect that Republicans are trying to jam them with their plan. Minority Leader Schumer said that there should be bipartisan negotiations on the plan right from the beginning. Mr. Schumer has been working on his own $750 billion plan.
In an eye-catching development, Treasury Secretary Mnuchin reportedly told Republican Senators at their lunch meeting on Tuesday that unemployment could hit 20% if Congress doesn’t pass a big stimulus bill. A Treasury spokeswoman said that Mr. Mnuchin was only throwing out possibilities and was not making predictions. Nevertheless, a 20% unemployment rate likely got Senators’ attention, especially since large-scale layoff announcements are already starting.
Fed announces two new direct loan programs that should help alleviate funding stress — The Fed on Tuesday announced two new direct loan programs that should help alleviate some of the funding shortages that have caused the recent systemic stress in the financial markets. A commercial paper program was announced early Tuesday, while a primary dealer program was announced late Tuesday after the markets closed.
The Fed early Tuesday announced its Commercial Paper Funding Facility with the approval of the Treasury. Corporations can raise short-term cash by selling unsecured commercial paper in the market with maturities ranging from a few days up to 8 months. The Fed on Tuesday reactivated its facility from the 2008/09 crisis to help alleviate the recent difficulty that some corporations have had raising money in the commercial paper market. The Fed’s facility will give investment-grade corporations a backup method of selling their debt if they are having problems.
Treasury Secretary Mnuchin said that the commercial paper market is a $1 trillion market, and that “We have the ability to have the Fed purchase up to $1 trillion of commercial paper as needed.” The only problem with the new facility is that the price for corporations will be expensive at 200 bp over the 3-month overnight index swap rate, plus a fee of 10 bp. Still, credit-worthy corporations will at least have a lender of last resort if they need one.
The Fed late Tuesday then announced its “Primary Dealer Credit Facility,” which will provide loans to government securities dealers at the discount rate of 0.25% for up to 90 days. The facility should help to hold down the repo rate by giving dealers access to the funding they need to hold and trade Treasury securities. The Treasury market late last week and early this week has seen problems with liquidity and wide spreads, raising questions about the functioning of the single most important market for the money market and fixed-income markets.
Still, the Fed has a lot of work to do with foreign central banks via its expanded swap lines since there is still a substantial shortage of dollar liquidity overseas. The 3-month cross currency basis for the euro, a proxy for how expensive it is to acquire dollars, widened to -128.5 bp on Tuesday, the most in 8-1/4 years and a sign of tension in the dollar funding markets. Foreign banks have built up a massive $12 trillion of loans in dollar terms, according to the IMF. Demand from institutional investors and corporations for dollar loans is spiking in the current crisis environment. The dollar on Tuesday soared by +1.54% on strong safe-haven and liquidity-demand for the dollar.
Stocks partially recover as Washington formulates a response to the crisis — The U.S. stock market on Tuesday rebounded higher as Washington talked about a stimulus bill of up to $1.2 trillion and as the Fed continued to take aggressive action to battle systemic stress in the financial markets. Still, the virus news remains grim as hospitals in some areas are expected to soon begin overflowing and as more businesses shut down and lay off their employees. An upward spike in unemployment claims and a sharp rise in the unemployment rate are imminent.
The S&P 500 index (SPX) on Tuesday edged to a new 15-month low but then recovered and closed the day up +6.00%, reversing about half of Monday’s -11.98% plunge. SPX on Tuesday’s low fell by a total of -30.2% from the mid-Feb record high. The VIX index early Tuesday posted a new 11-1/4 year high of 84.83 but remained below the record high of 89.53 posted in November 2008. The VIX closed the day -6.78 at 75.91 due to the rally in stocks. The 10-year T-note yield on Tuesday rose sharply by +36 bp to 1.08% due to the stock rally and the talk of big fiscal stimulus.
