Fed Tears Through 2008 Playbook to Counter Economic Hit of Virus

(Bloomberg) — The Federal Reserve has sped through a litany of tools from its playbook during the 2008 financial crisis to support the economy. While they have rolled out several forceful measures, they still have tools and may consider brand new approaches.

Here’s the list of tools the Fed has used in the past two weeks and what could come next:

Cutting Rates to Zero?
Check.
The Fed announced a rare, emergency interest rate cut on March 3 in between its regularly scheduled meetings and then on Sunday, slashed them again to near zero.

Outcome-Based Forward Guidance
Under consideration.

The Federal Open Market Committee’s statement Sunday that it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The guidance could be strengthened with language that suggests they will hold rates near zero for a long time, or until the economy achieves a numerical benchmark on inflation or employment. Outcome-based forward guidance was used during the financial crisis and has been discussed by Fed officials in recent months.
The market expects the Fed to maintain rates near zero through the end of 2021.

Quantitative Easing?
Check.
The central bank said in its statement Sunday that “over the coming months” it will buy at least $500 million of U.S. Treasury securities and $200 billion in mortgage-backed securities. That language left the door open to even more purchases, and potentially for a monthly amount as they did in previous rounds of QE.

Yield Curve Control?
Still possible.
This idea was floated by some officials during their debate over strategy and tools over the past several months. The idea is to cap longer-term yields with purchases to reinforce the central bank’s intent to hold rates low for a considerable period.

“The committee would commit to capping rates out the yield curve for a period consistent with its expectation for the duration of the outcome-based forward guidance,” Fed Governor Lael Brainard explained in a Feb. 21 speech. Ten-year Treasury yields jumped to over 1%, from a record low of 0.31% the week before, as the government considers massive stimulus that will force the Treasury to issue more debt.

Negative Interest Rates?
Probably not happening.
Unlike its European counterparts, the Federal Reserve has for the past several years pushed back from negative interest rates saying the tool wouldn’t be well suited to the U.S. economy which has more market-based finance than other countries. “We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Federal Reserve Chairman Jerome Powell said at his Sunday press conference.

Now, they have gone to Plan D!

AAA rated CLOs, CDOs and CMBS are among the collateral types eligible to be pledged by top banks and broker-dealers in order to access the Federal Reserve’s emergency lending program for primary dealers.

The Fed’s so-called Primary Dealer Credit Facility “will offer overnight and term funding with maturities up to 90 days and will be available on March 20, 2020,” the central bank said in a Tuesday statement announcing the countermeasure to the funding squeeze caused by the coronavirus crisis

It allows for short-term lending and will be available for at least six months at an interest rate equal to the discount rate, which was lowered to 0.25% on Sunday as part of the central bank’s emergency action
Facility resurrects a program the Fed rolled out in the depths of the financial crisis in October 2008

In addition to AAA rated CLOs, other eligible securities that can be used as collateral include IG corporate debt, international agency securities, IG commercial paper, municipal securities, MBS, and equities (with the exception of ETFs, unit investment trusts, mutual funds, rights and warrants)

CLO spreads are blowing out in secondary trading and the acceptance of CLO AAA tranches by the Fed’s facility could provide some relief. The PDCF program may help the market find an acceptable pricing level amid the volatility in secondary pricing, according to market participants

CLO AAA spreads are at post-crisis wides of 180bp for short weighted average life (WAL) and 230bp for long-WAL profiles.

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West Texas Intermediate crude fell another 16%.

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Meanwhile, the Dow is down another 7%.

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The Fed is going to plan D … which is BUY EVERYTHING!!!

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Fed Restarting Commercial Paper Funding Facility (Everybody Panic!)

As Jackie Moon screamed in the movie Semi-Pro, “Everybody Panic!”

(Bloomberg) – By Christopher Condon – The Federal Reserve will restart a financial crisis-era program to help U.S. companies borrow through the commercial paper market after it came under “considerable strain” due to the coronavirus pandemic.

The central bank is using emergency authorities to establish the Commercial Paper Funding Facility with the approval of the Treasury secretary, according to a Fed statement on Tuesday. The Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund.

The Fed said it will provide financing to a special-purpose vehicle that will purchase A1/P1 rated commercial paper from eligible companies, and purchases will last for one year unless the Fed extends the program.

Pricing will be based on the then-current 3-month overnight index swap rate plus 200 basis points, and each issuer must pay a facility fee equal to 10 basis points of the maximum amount of its commercial paper the SPV may own.

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Everybody panic!

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*Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days.

The Morning After! US Treasuries Surge, Mortgage Rate Spread Highest Since Q4 2008

It is the morning after the Fed panicked and lowered its lower bound for The Fed Funds Target rate to … 0%. Here is Fed Chair Jerome Powell calling to The Fed to take evasive action!

The result? US Treasuries yields are falling like a rock. US Treasury 10Y yields are down around 20 basis points this morning.

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And unless lenders lower their 30-year mortgage rates, the spread between Bankrate’s 30 year average mortgage rate and the 10 year Treasury yield is at its highest level since Q4 2008, the epicenter of the financial crisis.

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This morning before the US equities markets open, Europe is already down around 7% – 8%.

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Here is Fed Chair Jerome Powell wishing us all the best!

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LOIS (LIBOR-Overnight Indexed Swap) Spread Spikes As Fed Adds $4.5 Trillion To Its Balance Sheet

Historically, when the spread between LIBOR and the safer OIS (overnight indexed swap)  widened, it meant that banks were having trouble borrowing and was a warning of danger for the economy. And the LOIS spread is widening!

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The Federal Reserve has reversed course on its balance sheet unwind, but the reversal  started in September of 2019, well ahead of the known corona-virus outbreak in Wuhan China. In fact, The Fed has added $4.5 trillion in recent weeks.

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Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.

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Treasury Repo collateral has spiked recently.

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And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,

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leading to a steepening of the Treasury yield curve.

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Treasury volatility is on the rise again.

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The coronavirus is NOT a good thing.

Yes, coronavirus fears are sweeping the globe.

But The Fed drives me crazy!

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Boston Fed’s Rosengren Says Fed Should Consider a Wider Range of Assets (Whoomp, There It Is! Unusual and Exigent Circumstances)

Whoomp, there it is!

Boston Fed President Eric Rosengren is joining the “unconstrained rate manipulation squad” by calling for The Fed to purchase more than just Treasuries and Agency MBS.

(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren said policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.

With 10-year U.S. Treasury yields notes already at record lows, Rosengren said typical quantitative easing may not work as it did during the 2008 financial crisis. Therefore, the Fed may need the flexibility “enjoyed” by policy makers in Europe and Japan.

For the moment.
Remember, Maiden Lane LLC from 2008? The loan to Maiden Lane LLC loan was extended under the authority of Section 13(3) of the Federal Reserve Act, which permitted the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations.
Will The Fed declare unusual and exigent circumstances, like they did with Bear Stearns, JP Morgan Chase and Maiden Lane?
maidenlane
Perhaps The Fed will add stocks, corporate bonds and real estate citing unusual and exigent circumstance.
somaholdings
Fear is driving markets … and Central Banks.
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To quote Coates (Common) from the Keanu Reeve’s flick The Street Kings about The Federal Reserve, “We straight nightmares. We the walking, talking exigent circumstances.”

powellfearb

Thanks to Jesse at Jesse’s Cafe Americain for that wonderful Fear photoshop of Fed Chair Powell.

Fear! Ten Year Treasury REAL Yield Negative Along with TIPS Yields

Fear is still roiling the markets.

The REAL 10-year Treasury yield has gone negative.

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Along with Treasury Inflation Protected Securities (TIPS).

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Here is the TIPS curve compared with the US Treasury actives curve.

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The FRA/OIS is the spread between overnight index swaps (OIS), considered the “risk-free” rate tied to the federal funds rate, and forward rate agreements (FRA), which are tied to Libor. And it is rising fast!

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It is fear driving markets.

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Limbo Rock! US Treasury 10Y Yield Falls 12.6 Basis Points To 0.926% As Dow Drops 800 Points

The Washington Post had a howler of a story yesterday: “U.S. markets post big gains as Joe Biden’s Super Tuesday surge offers coronavirus respite”

It that was true, it was a very short-term effect given that the Dow dropped 800 points this morning.

dowdrop800

Or was it something else … like the IMF throwing $50 billion at the Coronavirus. And more stimulus from Central Banks like The Federal Reserve? But those effects were short-lived too.

The US 10Y Treasury yield fell another 12.6 basis points this AM to 0.926%. The lowest in history.

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And Freddie Mac’s 30Y mortgage survey rate (green line) continues to follow the 10Y Treasury rate down the rabbit hole.

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How long will rates go?

letslimbo

I want to thank Rick Sharga for remembering that I was one of the few that predicted what is happening today with interest and mortgage rates while most others predicted mortgage rates would rise above 8%.

Mortgage Lenders Hire Like Mad to Meet Demand as Rates Slide (Mortgage Applications Boom with Coronavirus)

Mortgage interest rates and US Treasury yields keep on going down. This is resulting in a wave of jobs for mortgage lenders and underwriters.

(Bloomberg) – By Shahien Nasiripour and Prashant Gopal – A drop in interest rates in response to the coronavirus outbreak is adding urgency to a hiring spree across the mortgage industry.

Executives at four of the nation’s 15 biggest mortgage lenders, already gearing up for a busy 2020, anticipate hiring thousands of employees this year to keep up with what they expect to be a flood of demand for purchase loans and refinancings.

Lenders are zipping through applications so fast that some expect to blow past origination records they set just last year. At Quicken Loans Inc., the nation’s largest mortgage lender, Monday was the busiest day for mortgage applications in the company’s 35-year history, said Chief Executive Officer Jay Farner.Michigan-based United Wholesale Mortgage, meanwhile, approved $2.5 billion of preliminary loans, a single-day record for the company, according to Alex Elezaj, its chief strategy officer.

The drop in rates, coming as Treasury yields plunge, is taxing an industry that was operating near capacity and setting off a battle for talent. Eric Mitchell, an executive at Michigan-based Gold Star Mortgage Financial, is luring underwriters with signing bonuses and the chance to make big money. That assumes they’re willing to work long hours while the market stays hot.

“If you’re not making a $1 million this year as a loan officer, you’re grossly incompetent,” Mitchell said. “‘I tell them, ‘We’re not working 40 hours a week, kiss your families goodbye.’”

Fears that the virus outbreak will stall growth have hammered stocks and raised fears of a recession. The Federal Reserve on Tuesday slashed its benchmark rate by half a percentage point in its first emergency move since 2008. And with the Treasury yields that guide mortgage rates sliding, loan officers juggling a mountain of refinancing applications, which soared last week to the highest level since May 2013.

Quicken expects to hire a few hundred new employees a month this year. United Wholesale Mortgage, a division of United Shore Financial Services Inc. and the nation’s third-largest home lender, plans to hire another 2,000 people in 2020 after it doubled in size last year to roughly 5,400 employees, Elezaj said.

Today’s MBA report on mortgage purchase applications and refinancing applications show a burst in application activity.

mbaflu

Refi applications in particular are soaring as Treasury yields collapse.

mbarefiflu

The spread between mortgage rates and Treasury yields is now at the highest level since the financial crisis.

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Only in America would a virus epidemic scare The Federal Reserve into lowering rates … that benefits mortgage borrowers and lenders.

charley

 

That’s Volatility! Dow Opens Up 500 Points, LIBOR Plunges To Financial Crisis Levels, Trading Volume Soars

We don’t know how bad the Coronavirus will be and how badly it will impact the global economy. Or what The Federal Reserve and other central banks will do to combat the anticipated slowdown. In other words, there is uncertainty spooking markets.

Total equity trading volume has been holding at very high levels, signaling emotion-driven moves. The 10-day moving average is at the highest since the growth-scare days in late 2011.

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The three-month dollar LIBOR plunged to financial crisis levels.

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The Dow opened up 500 points.

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And the 10-year Treasury yield keeps on dropping.

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Yes, volatility rears its ugly head.

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Stormy Monday: 10-Year Treasury Yield Slumps To 1.09% As Entire US Yield/Swaps Curves Below Fed Target Rate (Dow Up 100 pts on Opening)

It’s a stormy morning. Will Tuesday be just as bad?

We begin the week with the US Treasury 10-year yield falling to 1.09%.

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And the US Treasury and Dollar Swaps curves are entirely below the Fed Funds Target Rate (upper bound).

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The good news? The Dow is up over 100 points on opening.

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Tell me how do you feel?