Macro Analysis / Global

Rates Spark: Watch that curve

Use of Federal Reserve Facilities continues to fall

This week the Federal Reserve extended the various lending and support facilities that it provides to both Wall Street and Main Street. The latest data from its balance sheet confirms, however, that most of these facilities are on a declining trend. Some in fact have not been used at all (e.g. primary market credit facility).

Buying of corporate bonds by the Fed has slowed to a trickle. There are various measures to go by here, but the simplest which shows the stock of Fed holdings of corporate bonds show that it rose by a mere USD 155m in the past week. So the Fed is still in the game here, but only barely.

There were also further reductions in support for money market funds, commerical paper, and central banks' liquidity swaps also continued to drop in a precipiteous fashion. This is not because the Fed is becoming stingy. Not at all. It is because the need is not there from the system. This is good news as it suggests that the system does not need propping up.

There was a slight uptick in use of the Paycheck Protection Program. This is now running at USD 70bn, up almost USD 2bn on the week. This had plateaued, but is showing some resumed interest. The Main Street Lending Facility also grew, to USD 82m from USD 14m last week. These are not especially large numbers, but more a sign of lack of use than a sign of less stress.

The market impulse from this data is mixed. There is good news in the sense that the financial system is standing on its own two feet now. The bad news is that Main Street is not seeking enough solace from the Fed's facilities; there is a sense of "throwing in the towel". So there is not a huge amount to cheer about here. Hence the maintenance of downward pressure on long market rates.

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