Chairman of the Federal Reserve, Secretary of the Treasury out of sync

It appears that the synergy between Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin in tackling the fallout from the coronavirus pandemic has evaporated.

In what could be an unprecedented feud between two of the country’s most prominent economic leaders, Mnuchin sent a letter to Powell on November 19, stating that he would let some emergency lending facilities created by Coronavirus Aid expire, Relief, and Economic Security Act. December 31st.

He believes this is what Congress intended. He therefore demanded that the Fed return nearly $ 200 billion in unused funds to the Treasury, which “would allow Congress to reclaim $ 455 billion, including $ 429 billion in excess funds from the Treasury for Reserve facilities. federal government and $ 26 billion in unused funds. Direct Treasury Loan Fund. “

The Fed responded almost immediately with a short statement: “The Federal Reserve would prefer that all of the emergency facilities put in place during the coronavirus pandemic continue to play their important role in supporting our still strained and vulnerable economy. “

And it starts. At stake is the future of the Municipal Liquidity Facility, the Main Street Loan Program, the Primary Market Business Credit Facility, the Secondary Market Business Credit Facility, and the Debt Loan Facility. term asset-backed securities.

At the same time, Mnuchin requested a 90-day extension of the Commercial Paper Funding Facility, the Prime Broker Credit Facility, the Money Market Liquidity Facility and the Credit Protection Program Liquidity Facility. paychecks.

I agree that it would be a mistake to let the facilities for municipal bonds and small businesses expire, not only because their finances are most threatened by the pandemic, but also because these programs are hardly used in the first place – a safety net in each direction.

Those for corporate debt, on the other hand, don’t seem quite necessary given that junk bond yields are near all-time lows and investment grade markets are wide open.

Mnuchin argues in his letter that the facilities “have clearly served their purpose”, highlighting figures for municipal debt issuance, corporate bond spreads and asset-backed securities rates. Yet the announcement flies in the face of Powell’s long-held position – thought to be shared by Mnuchin – that “when this crisis is behind us, we will put away these emergency tools.” The Covid-19 pandemic is only getting worse across America, from rural counties to New York City.

If you’re concerned about Mnuchin’s recent announcement that he is canceling emergency loan programs, here’s some good news.

Investors in corporate bonds have flooded the bankers of Carnival Corp. over $ 11 billion in debt orders without any collateral protection. It was a sign that the credit markets are not as fragile as some may have thought.

After around $ 2 trillion in borrowing helped companies bolster their balance sheets with cash to weather the pandemic, the streets appear to have grown increasingly confident – perhaps even complacent – that corporate bankruptcies Widespread businesses predicted by much earlier this year were largely avoided. To be sure, the Fed has helped fuel almost all of these debt issuances and demand to support them.

And even if the immediate lifeline of $ 580 billion in support money is returned by the Federal Reserve to the Treasury, it looks like the streets believe the markets will be doing very well, anticipating the government will step in again. if new signs of stress emerge.

Carnival Cruise Lines, an indicator for companies hardest hit by the pandemic, raised around $ 9 billion through the issuance of bonds and loans secured by its unused ships earlier this year, some with higher coupons at 10%. Now, the company is borrowing at a rate of 7.625% without pledging any assets, according to rumors in the street.

Investors have placed orders of more than $ 11 billion for the offering which is expected to be around $ 2 billion, including bonds in dollars and euros.

Note to readers: I will be teaching investment analysis for the Osher Lifelong Learning Institute at Ringling College again starting January 11. Call 941-309-5111 to register and get information.

Lauren Rudd is Financial Advisor at Raymond James & Associates Inc., Member of New York Stock Exchange / SIPC, located at 1950 Ringling Blvd # 401 Sarasota, FL 34236. Contact him at 941-706-3449. This market commentary is provided for information purposes. purposes only. All opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you can incur a profit or a loss regardless of the strategy you choose.

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