Central banks deploy record sums to break financial
logjam, but may need more
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[March 23, 2020] By
Tommy Wilkes and Lawrence Delevingne
LONDON/BOSTON (Reuters) - Central banks
have offered trillions of dollars of support to markets in recent days
to keep them from freezing up, as investors worried about the economic
damage from the coronavirus and made a chaotic dash for the exits.
While the intervention helped bring back some order to markets,
policymakers may need to do more.
Investors, economists and bank strategists said they expect policymakers
will have to step in with more support in the coming days to prop up
both markets and the real economy - companies losing customers and
workers thrown out of jobs.
There is a limit for now to how effective authorities can be, however,
some said. Before investors calm down, these observers said, they will
need to see a peak in new virus infection rates, an improvement in
hospitals’ ability to cope with an influx of patients, and an end in
sight to the economy-killing quarantines, travel bans and other
restrictions being imposed to save lives.
"The best that economic and financial policymakers can do right now is
limit the damage. They cannot turn the economy around because this is a
health issue, not an economic or financial issue," said Mohamed El-Erian,
chief economic advisor to the German insurer Allianz SE < ALVG.DE>, in
Estimates of the sums required to keep Corporate America afloat are
reaching eye-popping levels. Ray Dalio, founder of hedge fund giant
Bridgewater Associates LP, estimates the financial losses for U.S.
companies from the coronavirus-induced slump could be about $4 trillion.
That’s nearly one-fifth the value of America’s total economic output
last year. The government will have to come to the rescue, Dalio told
Reuters via email, backed by a central bank that prints money.
"What needs to happen is very similar to what happened in the war years,
but without the fighting," Dalio said.
Governments ramped up their support quickly in recent days as it became
clear that the scale of the hit from the virus is likely to be huge.
Last week was the worst since 2008 for the U.S. stock market. Less
visible is the stress building up in other markets that keep the real
economy humming, such as the markets where companies go to raise short
term cash to pay staff and where cities go to raise money for roads and
schools. Many central bank measures have been aimed at reducing the
strain in those areas.
These steps have ranged from slashing interest rates and ramping up bond
buying programs to the Federal Reserve’s resurrection of funding
facilities from the financial-crisis era. These steps have eased the
strain, but analysts and investors said they didn’t go far enough, and
new areas of concern have emerged.
One success: The Fed has made it easier for other nations’ central banks
to obtain dollars to meet runaway global demand for the greenback. As
the Fed acted, a key measure of the premium investors pay to access the
U.S. currency fell to its lowest level since March 3. The measure, known
as the euro-dollar <EURCBS3M=ICAP> swap spread, fell to less than 4
basis points, or 0.04%, on Friday after going as wide as 86 basis points
on Monday. But in a sign that the thirst for dollars globally remained
unsatiated, the U.S. currency remained strong.
A spokesman for the Fed declined to comment on a request sent Sunday
Traders also complained during the week about problems trading U.S.
government bonds and other kinds of debt amid large price swings. There
has been a shortage of buyers despite the Fed providing more funding and
purchasing some types of assets. Yields continued to rise in municipal
debt markets, for example, where the Fed’s support was limited to
short-term debt and highly rated issuers. Yields rise when bond prices
[to top of second column]
A trader wears a mask as he works on the floor of the New York Stock
Exchange (NYSE) as the building prepares to close indefinitely due
to the coronavirus disease (COVID-19) outbreak in New York, U.S.,
March 20, 2020. REUTERS/Lucas Jackson/File Photo
In commercial paper markets, where companies go to access short-term funding,
the Fed launched on Tuesday a new facility that buys commercial paper from
highly rated companies. It helped, said Blake Gwinn, a strategist at NatWest
Markets Plc, but the borrowing costs were higher than expected and the facility
was too limited in targeting the strongest borrowers.
In a research note Friday, he wrote that without significant changes, the
program “would not do much to unclog” the commercial paper market. Gwinn, a
former trader for the New York Federal Reserve, said the central bank should
become a direct buyer of clogged assets, rather than “merely providing funding
and hoping” that banks and other players will do the heavy lifting.
Some analysts and industry sources argued for loosening of bank regulations
which, in their view, are restricting liquidity - the ability to easily buy and
sell assets. Suspending these rules, they argue, will make it easier for banks
to step in as market makers and lenders in a bigger way.
“The next crucial step in aiding liquidity will be to ease bank regulatory
constraints,” TD Securities strategists wrote in a note.
One sign that the measures so far are insufficient: persistent volatility in
markets. Volatility - large ups and downs in asset prices - is at extreme
levels, as measured through indicators such as the market fear gauge <.VIX> in
stocks and the Deutsche Bank Currency Volatility Index <.DBCVIX> in currencies.
High levels of volatility have forced funds and banks to sell their positions or
step back from market-making, the all-important role of go-between in big
trades, as they try to keep the amount of risk in their portfolios in check,
bank strategists said. That, in turn, has led to more sellers than buyers,
resulting in gaps between bid and offer prices of assets, which exacerbates
Some of the measures taken by the Fed - such as buying bonds and lending money
to banks so they can step in as buyers for some of these assets - are aimed at
ending that logjam. But these steps have not managed to soothe the markets.
One example is the market for Treasury bonds, one of the world's most liquid
assets. Prices continued swinging sharply last week. In normal times, Treasury
yields move a few basis points, or hundredths of a percent. The 10-year Treasury
<US10YT=RR> saw a 43-basis-point swing in yield on Friday, versus a swing of
about 27 points on Wednesday and Thursday.
Another concern for central banks that is gaining more urgency: corporate
U.S. and European corporate debt markets have seized up, with markets for new
issuance of bonds virtually shut and spreads spiking in secondary markets. The
costs that companies pay to borrow in bond markets have surged to multi-year
highs and remain highly elevated despite the central bank moves. Adding to the
stress, ratings agencies have started downgrading companies as the revenue
squeeze gets worse.
Allianz's El-Erian said he suspected that a coordinated U.S. Treasury and Fed
attempt is in the works to counter market failures in areas U.S. authorities
have not yet targeted, such as the market for corporate credit. That
intervention, he predicted, would be made "over the next few days, not even
(Additional reporting by Ritvik Carvalho and Sujata Rao in London, and Megan
Davies and Jessica DiNapoli in New York.; Editing by Paritosh Bansal, Mike
Williams and Edward Tobin)
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