The Federal Reserve is not leaving any corner of the U.S. bond market behind in this crisis. There’s no other way to interpret the central bank’s sweeping measures announced Thursday, which together provide as much as $2.3 trillion in loans to support the economy. It will wade into the $3.9 trillion U.S. municipal-bond market to an unprecedented degree, can now purchase “fallen angel” bonds from companies that have recently lost their investment-grade ratings, and has expanded its Term Asset-Backed Securities Loan Facility to include top-rated commercial mortgage-backed securities and collateralized loan obligations.
This is new and close to what I’ve argued for over the past year. The Fed’s facility will buy muni debt directly from issuers that’s sold for cash-flow purposes and matures no later than 24 months from the date of issuance. I had figured that for simplicity the central bank would make this available only to
states, but the Fed decided that in addition to states and Washington, D.C., it would also buy notes from cities with more than 1 million residents and counties with more than 2 million. The Treasury Department is making an initial $35 billion equity investment, and the vehicle can snap up as much as $500 billion of eligible debt.
The buck has to stop somewhere and the support mechanisms announced following the lockdowns resulted in the burden of fiscal supports falling unevenly on different portions of the market.Click HERE to subscribe to Fuller Treacy Money Back to top