November 20, 2020
The Closing of Two Fed Credit Facilities
U.S. Treasury Secretary Steven Mnuchin recently announced that several Federal Reserve (Fed) lending programs won’t be extended beyond year’s end.
Our thoughts on the possible implications of Mnuchin’s decision:
- Lightly Utilized: The two credit facilities had been lightly utilized, deploying less than $14 billion of the $750 billion available under the two facilities. The market has largely viewed the ongoing purchases as immaterial compared to the psychological impact achieved through the March 23 announcement of the credit facilities’ formation, which signaled the extent of the Fed’s support.
- Modest Impact: We expect only a modest impact on spreads in the short run given the underlying economic momentum and reduced market uncertainty with the development of COVID-19 vaccines, conditions that may provide a more attractive entry point for investors able to withstand some volatility
- Infrastructure in Place: The credit facilities took about three months to begin purchases of corporate bonds, but now, with all the infrastructure in place, they could be reopened much more quickly should liquidity deteriorate.
In summary, we expect only a modest impact to spreads in the near term as credit markets have been functioning normally and haven’t been reliant upon the Fed’s purchases. With most of the programs’ impact coming through signaling and not purchases, markets are likely to focus more on the trajectory of the economic recovery and distribution of forthcoming vaccines. Importantly, the Fed immediately objected to Mnuchin’s move, stating, “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” This stance may speed any needed reopening of the credit facilities, especially with the infrastructure already in place.
This publication is provided by Pacific FundsSM. Pacific Funds refers to Pacific Funds Series Trust. The views in this commentary are as of November 20, 2020, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.
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