23 March 2020 by jbchevrel
Risk sentiment was weak ahead of the Fed’s new programs’ announcement. The spread of COVID-19 and various estimates of the economic damage over the weekend are the ultimate culprits to blame (or to hail) for the widening, plus the dispute in the US Senate over passage of the $2T relief package. Last week the ECB announced €750bn PEPP (~5% GDP over 9m). The RBNZ pledged overnight to buy NZGBs for ~10% GDP over 1y. Over the weekend, Germany announced a €150bn supplementary budget estimate that will see their total deficit approach 5% GDP in 2020. More importantly, today, the Fed announced a 2nd wave to support the US economy, including buying an unlimited amount of bonds for as long as needed (??% GDP over ??months). The FOMC will purchase USTs and agency MBS in the amounts needed for as long as necessary (they had previously announced >=$500b of USTs and >=$200b of MBS but they add agency CMBS and corporate bonds). Three programs to support large employers’ credit. The Primary Market Corporate Credit Facility (PMCCF) for new bond and loan issuance, the Secondary Market Corporate Credit Facility (SMCCF) for outstanding bonds, the Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses enabling the issuance of ABS backed by student, auto, credit card loans, and loans guaranteed by the Small Business Administration, among others. The intervention into the corporate bond market is new for the Fed, but nothing new in absolute (BOJ, ECB CSPP, BOE CBPS). One additional upcoming program to support small employers’ credit, called Main Street Business Lending Program (MSBLP) to support lending to eligible SMEs, complementing efforts by the SBA. The Fed’s new credit facilities carry limits on paying dividends and making SBBs for firms that defer interest payments, but have no explicit restrictions preventing beneficiaries from laying off workers. The Fed’s announcements have seen CDX IG tighten by ~40bp in absolute. From 160 are to 120 area. SPX went 2.2 to 2.4 stopped up then back 2.2 quickly, as the focus shifted back to the stalemate in Congress. Huge outperformance of CDX IG not only vs SPX, but also vs CDX HY. Indeed, the CDX HY s33 is wider by +86bp while the CDX IG s34 closed tighter by -20bp. in 1:5 that’s a +186bp decomp, on our € close. Some outperformance of CDX IG s34 (-20) also present vs iTraxx Main s33 (-5). The RV thus closes at +12bp on our close, from +27bp on Friday, and it even took a look below +10bp intra-day. I wouldn’t under-estimate the ECB leg either. Various ECB speakers suggested that there is further ammunition left. German board member, Schnabel, said in an interview with FAZ: ‘The ECB is in the comfortable position of having a large set of tools, none of which has been used to its full extent’. Vice president de Guindos told a Spanish TV station that he expects an EU wide, coordinated response and mentioned ESM support and the issue of Eurobonds. French ECB member Villeroy also said that he would be supportive of using the ESM in the crisis response. This is for central banks. Now we have WTI at $23/bbl. That really has the potential to take CDX--Main back wider, when drillers default. Drillers in the US have been among the main culprits to blame (or to hail) for the NAV widening (along with autos and cruise names), but it is not clear to me yet why this sector should embrace the new prospects of MCCFs. We closed the IG34 NAV at 183 at the IG33 NAV at 176.