Federal Reserve announces lending program details on up to $2.3 trillion to support the economy

Gary Pzegeo, CFA
April 09, 2020

The latest FOMC announcement provides further detail on programs already established.

The Federal Reserve released an announcement this morning providing some detail around lending facilities to support the economy during the coronavirus pandemic. Money allocated to the U.S. Treasury as part of the recently enacted CARES act will be used as a first loss equity investment alongside loans facilitated by the Fed in an amount up to $2.3 trillion with today’s announcement. The announcement contains revised details on previously established programs covering corporate bonds and asset-backed securities, new facilities covering State and Local municipalities, and new lending programs for small- and mid-sized businesses.

Treasury funds available through the CARES act could provide a total of nearly $5 trillion over time, so the Fed will be able to make additional loans if needed.

While we have been expecting details from the Fed since the legislation passed, the underlying program term sheets reveal a few market friendly surprises.

  • Expanded size and scope of corporate lending facilities - The Fed has increased the allocation to $750 billion (up from the original $200 billion) and will make loans to issuers downgraded to high yield subsequent to the program launch on 3/23. This increased size reiterates the Fed’s intention to go “all-in” and the inclusion of BB rated issuers diminishes the threat of downgraded companies losing eligibility from the program and overwhelming the high yield market.
  • Expanded scope of the asset-backed facility to include AAA rated commercial mortgage-backed securities and collateralized loan obligations.
  • $500 billion separate Special Purpose Vehicle (SPV) for municipalities. The Fed will lend to States and qualifying Counties and Cities with up to 24 month terms. Those issuers will distribute funds to smaller entities within their jurisdiction.

Chairman Powell spoke following the release and stated that the announcement covers, “…lending powers not spending powers”, and that many will require direct fiscal support, leaving the door open for additional action.

Markets are viewing this very positively.  Equity and credit instruments are higher on the announcement. High Yield credit default swaps, an indicator of default risk, fell to their lowest level in over a month and equities were up nearly 2%.

View the full FOMC announcement. 

 

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.