Treasury Secretary Steven Mnuchin on Thursday asked the central bank to return money earmarked under the March pandemic relief act for emergency lending to businesses, nonprofits and local governments, marking an end on Dec. 31 to most of the crisis-response programs the Federal Reserve has deemed vital to keeping the economy stable.
U.S. Treasury yields slipped on the news, which came out after Wall Street closed. The yield on the 10-year note US10YT=RR was last at 0.842%. U.S. stock futures EScv1 also fell 0.84% when trading resumed.
ANDY RICHMAN, DIRECTOR OF FIXED INCOME STRATEGIES, STERLING CAPITAL MANAGEMENT, JUPITER FLORIDA
“If you don’t have these programs, in general it’s a risk-off situation for the markets. They have not been much used but they were there as a backstop and even the thought of them was seen as a safety net. If something did go wrong the Fed was there.”
“Losing that backstop is a slight risk-off, and would favor Treasuries and not favor things like some corporate bonds and equities. In a slight way, not a major impact.”
MATT FABIAN, PARTNER, MUNICIPAL MARKET ANALYTICS, WESTPORT, CONNECTICUT
“Investors have banked on the MLF (Municipal Liquidity Facility) being a reliable, emergency lender to our (municipal bond) market’s core borrowers. It has taken the idea of a payment default or catastrophic budget problem off the table. Without the MLF, the market won’t collapse, but it will lack some resilience if its tested by a selloff or more pronounced credit fears.”
ISAAC BOLTANSKY, DIRECTOR OF POLICY RESEARCH, COMPASS POINT RESEARCH & TRADING, WASHINGTON DC
“The Fed has been one of the only sources of stability in Washington and removing its latitude to offer support in a shaky recovery is simply nonsensical. This is a distressing development that injects uncertainty and instability into markets completely unnecessarily. How many times will Washington trip on its shoelaces in response to this crisis?”
SUBADRA RAJAPPA, HEAD OF US RATES STRATEGY, SOCIETE GENERALE, NEW YORK
“You’re seeing a flight to quality, a safety trade, on the Treasuries. Perhaps that is because of concerns that some of the Fed backstops, especially for corporate and municipal bonds, are going away.
“The Fed isn’t really authorized to buy some of these assets. The only way they were able to do it was in conjunction with the Treasury. The question now is what sort of reaction from the credit markets we’ll see.”