NEW YORK – The Federal Reserve may announce measures on Sunday night aimed at bolstering liquidity in the commercial paper market, used by companies for short-term loans, analysts at Bank of America wrote.
The bank’s analysts said they believe the Fed will announce a Commercial Paper Funding Facility, an operation previously used in 2008 in which the Fed buys commercial paper from issuers directly, and a Commercial Paper Dealer Purchase Facility in which the Fed would buy commercial paper from dealers directly.
The measures, if taken, would be aimed at buffering the market ahead of potentially large outflows from money market funds in coming days, analysts at the bank wrote.
“We believe it imperative the Fed roll out these facilities on Sunday night given the looming expected prime (money market fund) outflows and necessity of their ability to sell (commercial paper) in order to raise cash,” the report said. “If the Fed waits too long the (money market fund) outflow pressure could mount and the risk of a large scale (money market fund) run could increase.”
The Fed had not yet responded to a request for comment at the time of publication.
Liquidity – or the ability for buyers and sellers to easily transact – has dried up in the commercial paper market in recent weeks as the coronavirus has roiled credit markets and hit the price of commercial paper. Expectations of a rush of new issuance has also driven prices lower.
Companies rely on the market as a source of short-term cash for payrolls, inventory and accounts payable as well as unanticipated funding needs.
Investors are demanding the highest premium since March 2009 to hold riskier commercial paper versus the safer equivalent, according to Refinitiv Eikon data. The spread between the overnight AA-rated paper of nonfinancial companies versus riskier overnight P2 paper rose to 73 basis points on Thursday, the most recent data available from the Federal Reserve.
Without access to the commercial paper market, companies could turn to banks to draw on their lines of credit, potentially putting stress on lenders, the analysts said. At the end of 2019, banks had $2.5 trillion of unused corporate credit commitments according to the report.
Outflows have already started in prime institutional funds and may spill over into government money market funds depending on the severity of quarantines around the county and concerns over access to cash, the bank said.
U.S. money market funds took in a record $87.6 billion in the week to Wednesday, data from Lipper showed.
The market ructions could spur nervous investors to withdraw from money market funds en masse, creating a run like that seen in 2008 with the Reserve Primary Fund, a $65 billion fund which saw its net asset value “fall below $1 thus resulting in investors receiving an amount of cash lower than what they originally deposited,” analysts wrote.
The Fed on Friday launched a wave of $37 billion of Treasury security purchases to address volatile conditions in the government bond market caused by the coronavirus outbreak.
Boeing Co, Hilton Worldwide Holdings Inc and SeaWorld Entertainment Inc drew on or increased the size of their credit lines in recent days. All three companies are in sectors directly affected by reduced tourism and discretionary spending due to the coronavirus.
(Content and photos syndicated via Reuters)
