C — Central Banks

Central Banks Keep Affirming Their Support To The Economy

16 June, 2020

Yesterday, Bloomberg reported that the U.S. Federal Reserve said “it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.” The central bank also spelled out for the first time how it plans to implement its buying strategy. It will create a portfolio based on a broad, diversified market index of corporate bonds. According to the WSJ, “the index will be made up of all the bonds in the $9.6 trillion corporate debt market from companies that satisfy the program’s criteria, including that companies were investment-grade-rated as of March 22 and that securities can be no more than five years in duration.”

 

 

In the meantime, the Federal Reserve Bank of Boston also announced that the Fed’s Main Street Lending Program opened for lender registration. Reuters highlighted that “the program, targeted at companies that were in good shape before the pandemic but may now need financing to retain workers and fund operations, will offer up to $600 billion in loans through participating financial institutions to U.S. businesses with up to 15,000 employees or with revenues up to $5 billion.”

 

 

This morning, the Bank of Japan followed the Fed by revising upward the estimated size of its virus-response measures to 110 trillion yen, up from 75 trillion yen, while pledging to do more to help the pandemic-hit economy if needed.

 

 

The focus will now shift to monetary policy meeting of the Bank of England. According to Bloomberg, “while the central bank is widely anticipated to focus on expanding its quantitative-easing program on Thursday, speculation is building that it will impose yield-curve control – a policy pioneered by the Bank of Japan – in the coming months.” All in all, the BOE is likely to implement another accommodative move following the ECB earlier this month. As a reminder, on June 4, the ECB intensified its response by expanding purchases by 600 billion euros to 1.35 trillion euros, and extending them until at least the end of June 2021.

 

 

In a context where inflation expectations remain low in G7 countries and risks appear clearly skewed to the downside (2nd wave, trade war, hard Brexit, U.S. elections, geopolitical tensions, social unrests, financial risks such as CLOs, CMBS, etc.), central banks will remain very accommodative in 2H20. We should see another increase in G7 CBs combined balance sheet, well above the $20 trillion threshold.