Fed May Target Commercial Paper Purchases, BofA Says
Fed May Target Commercial Paper Purchases, BofA Says
(Bloomberg) -- The Federal Reserve may take steps to ease strains in the commercial paper market, a source of short-term funds for companies that has frozen up amid the global market rout, according to Bank of America Corp. strategists.
The central bank could announce facilities to buy commercial paper Sunday evening, strategists Mark Cabana and Olivia Lima said in a note dated March 13. Without Fed intervention, spiraling costs of the short-term IOUs could pressure bank balance sheets and cause a run on money-market funds that hold the debt, they said.
“If the Fed waits too long,” the strategists wrote, outflows from money-market funds could mount “and the risk of a large scale MMF run could increase.”
The launch of a special lending facility would require the Fed to consult with the Treasury Secretary and to give Congress details on borrowers, amounts and collateral, according to laws put in place under the 2010 Dodd Frank Act. The laws also prohibit the Fed from using such a facility to help a single company or a company that is insolvent.
Federal Reserve spokeswoman Michelle Smith declined to comment.
Companies sell commercial paper to fund everyday activities such as rent and salaries. The market came under stress in recent days as the coronavirus pandemic crimps corporate revenues and prompts businesses to shore up cash.
That dash for cash caused relative yields on commercial paper to surge last week, with rates on three-month paper for non-financial companies reaching the highest level since the financial crisis relative to a funding benchmark known as overnight indexed swaps.
Money-market funds are also selling commercial paper in order to raise cash in anticipation of investor withdrawals, according to the Bank of America strategists.
If the Fed takes action, it would likely create two facilities that would buy commercial paper directly from issuers as well as purchase the debt that’s stuck on dealer balance sheets, the strategists wrote. The first facility would be similar to one created during the 2008 financial crisis, which allowed companies to continue funding themselves through the market stress, they said.
To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net;Craig Torres in Washington at ctorres3@bloomberg.net
To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net, ;Alister Bull at abull7@bloomberg.net, Linus Chua, Margaret Collins
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