The Federal Reserve’s emergency lending facilities attracted little additional use over the past week, as an expansion of the US central bank’s purchases of bond funds and commercial paper was partially offset by continued declines in other programmes put in place to prop up financial markets in March.
According to figures released late on Thursday, $96bn of the Fed’s firepower has been deployed through the facilities, after accounting adjustments, from $95bn a week earlier.
That is still less than 4 per cent of the at least $2.6tn the central bank has said it would make available across an unprecedented range of asset classes.
The figures come against a backdrop of relatively buoyant markets, underscoring again how the Fed has been able to change investors’ behaviour even before many facilities are fully up and running.
The Fed’s holdings of exchange traded funds that invest in corporate bonds ticked higher by $1.3bn, taking its total spending on that asset class to $3.1bn, according to the figures.
The ETF purchases are part of the Fed’s broader plan to support the secondary market for corporate bonds, although the full facility is yet to come online. A second facility for buying corporate debt directly from issuers is also not ready.
The Fed’s announcement that it would begin buying corporate bonds and ETFs that track the market prompted a flood of cash to flow into the asset class. An investment-grade bond ETF run by BlackRock’s iShares, known by its ticker LQD, has swollen by $12bn to a record $49bn since the announcement on March 26. The total assets in an iShares high-yield bond ETF called HYG have also hit a record of $25bn.
The yield on corporate bonds, which moves inversely to price, has declined. The average yield on investment-grade corporate bonds has fallen to 2.54 per cent, down from 4.7 per cent at the peak of the turmoil in March, and even lower than where it started the year at 2.9 per cent.
“The Fed support provides a tremendous backstop,” said Tom Krasner, co-founder at Concise Capital. “The economy would have been in freefall without it.”
The Fed’s reported figures included a cash infusion from the Treasury department that is slated to be used to help set up additional facilities. Many of the programmes have financial backing from the Treasury in order to protect the Fed against credit losses.
Stripping out the accounting effect of the infusion, usage of the Commercial Paper Funding Facility, or CPFF, which has helped to unfreeze a $1.1tn market used by companies to raise cash for short-term needs, rose slightly in the past week, by $207m to $4.5bn.
The Primary Dealer Credit Facility, which provides loans of up to 90 days to approved dealers of government debt, was used less in the past week, and has seen its usage decline 81 per cent since its peak during the week of April 15.
The facility aimed at supporting money market mutual funds has likewise had reduced demand, with its usage falling 37 per cent since its peak during the week of April 8.
The Fed has already pumped $2.2tn into financial markets through the resumption of government bond purchases, or quantitative easing. The emergency lending facilities are designed to add trillions of dollars more through interventions targeted to particular markets or sectors in distress.
“The effect of the programmes is more psychological than financial,” said Jim Shepard, who runs investment-grade bond issuance at Mizuho in New York. “The Fed has totally achieved their target.”