FLUFF AND FOLD
Courtesy of Grant's Almost Daily
A pair of Bloomberg headlines, concerning Brazilian President Jair Bolsonaro:
From Oct. 7:
Bolsonaro Declares Brazil Corruption-Free and Ends Carwash Probe
And from Oct. 15:
FROM HERE TO ETERNITY
From the unintended consequences files: The Financial Times reported over the weekend that Federal Reserve higher-ups are considering beefed-up regulation to combat risks associated with the current low-and-lower interest-rate regime.
Boston Fed president Eric Rosengren told the FT that “if you want to follow a monetary policy. . . that applies low interest rates for a long time, you want robust financial supervisory authority in order to be able to restrict the amount of excessive risk-taking occurring at the same time.” Neel Kashkari, president of the Minneapolis Fed, added: “I don’t know what the best policy solution is, but I know we can’t just keep doing what we’ve been doing. As soon as there’s a risk that hits, everybody flees and the Federal Reserve has to step in and bail out that market, and that’s crazy. And we need to take a hard look at that.”
A pullback in market interventions may be one way to limit moral hazard. Thus, a report last Thursday from the Congressional Oversight Commission recommended that the Fed wind down its Secondary Market Corporate Credit Facility (SMCCF) bond purchase program initiated during the teeth of the spring panic, explaining that: “Given the Federal Reserve’s success in buoying corporate bond markets and recognizing that primary market investment-grade corporate bond rates are now below pre-pandemic levels, the Commission does not believe that further secondary market corporate bond purchases through the SMCCF are necessary.”
Indeed, this year’s severe economic shock has visited no lasting damage on financial assets, with the stock market near record highs and credit spreads not far removed from their pre-virus levels, while year-to-date junk bond issuance reached $351 billion on Friday according to Bank of America, some $30 billion above the prior high-water mark set in the 12 months of 2012.
To be sure, animal spirits are percolating: This morning, Caa1-rated satellite communication concern Ligado Networks (née LightSquared) managed to sell a total of $3.85 billion in first- and second-lien three-year secured debt at 15.5% and 17.5% coupons, respectively, allowing the company to forestall a potential return to bankruptcy (Ligado’s exit financing, a first-lien term loan due in December, fell as low as 48 cents on the dollar in March). The offering is pay-in-kind, meaning the company will provide interest in the form of additional debt, rather than cash.
As the Fed’s monetary exertions have reached unprecedented heights during the crisis-wracked 2020, there is every reason to expect more of the same when trouble strikes next. After speculating that the recession may already be over in a speech today, vice chairman Richard Clarida nevertheless declared that “additional support from monetary – and likely fiscal – policy will be needed.”
The seeming convergence between fiscal and monetary policy stands as a singular feature of the current monetary epoch, as exploding federal deficits ($3.1 trillion in the 12 months through September, more than double the prior record set in fiscal 2009) coincide with ballooning Reserve Bank credit at the Federal Reserve, as the central bank currently buys about $80 billion in Treasurys per month, net of reinvestments. Randal Quarles, Fed vice chair for supervision, offered some eye-opening candor in that regard last Wednesday:
It may be that there is a simple macro fact that the Treasury market being so much larger than it was even a few years ago, much larger than it was a decade ago and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there.
Will there be some indefinite need for the Fed to provide — not as a way of supporting the issuance of Treasuries, but as a way of supporting a functioning market in Treasuries — to participate as a purchaser for some period of time?
It sure seems that way.
RECAP OCT. 19
Stocks came under heavy pressure with the S&P 500 losing 1.6% and finishing near its worst levels of the day, leaving the broad index up 6% so far this year. The Treasury curve steepened a bit with the 30-year yield climbing two basis points to 1.55%, while gold held at $1,905 an ounce and WTI crude remained near $41 a barrel. The VIX jumped above 29 to approach a five-week high.
– Philip Grant
Top image by Public Co from Pixabay.
Second image by Greg Montani from Pixabay.
