Unsplash/Nick Chong
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Move over retail investors, there’s a new market mover in town…the Fed. Yesterday, Jerry Interest Rates announced that the US central bank would consider purchasing corporate debt from individual companies as part of the Secondary Market Credit Facility it established on March 23 in response to the coronavirus pandemic.
And the announcement was just what the markets ordered. Plunge Protection Team assemble! The day was shaping up to be another potential massacre as the S&P and Nasdaq opened down 2.5% and the Dow was down 700 points. After the news, markets fully erased the deficit with the Dow closing up 157 points and all three indices ending positive. For those of you keeping score at home, that’s really, really good.
Let’s explain
By announcing that it will buy corporate bonds, the Fed is signalling to the investment world that it is going to prop up credit markets by any means necessary during these…unprecedented times. “Secondary Market” means that the purchase takes place on an exchange. Just like a stock, the Fed will buy corporate debt from other owners, as opposed to the bond issuer itself.
But Jerry has standards. Companies need to have been BBB- / Baa3 rated as of March 22 and the program will only buy bonds that have maturities of five years or less.
This power move should benefit companies who took big hits thanks to COVID but previously were pretty solid. In other words, Hertz is still f*cked.
The bottom line…
By offering to buy the bonds the Fed isn’t only providing security to the fixed income market but doing stocks a solid. But that’s not the only good news the Fed issued yesterday. The central bank officially opened its main street lending program, according to the Boston Fed.
It encouraged banks to begin lending the allotted $600B to qualified businesses in need. Once banks give those funds out, the Boston Fed will buy up to 95% of them back from the banks. Ruth’s Chris did not appear on the initial list of names of loan applicants.
Water Cooler Talking Point(s)
💧 “Powell-Portnoy 2020 would dominate the polls.” (Ian, The Water Coolest HQ)
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