CPFF, PDCF, And Eventually An Emergency Stimulus Package?

In our last post, we argued for the market calls for the Fed’s direct involvement in the credit market rather than just rates. We also highlighted the difficulties of the move. The Fed did respond to market concern very soon after, in the form of the CPFF (Commercial Paper Funding Facility) which was originally introduced during the crisis of 2008. The Fed will purchase the outstanding balance of commercial papers with the rating at least A-1/P-1/F1 for a period of 1 year with the price of overnight swap rate + 200bp. This means, US corporates (including US subsidiaries of foreign companies) could finally tap the Fed’s money, which should help ease market concerns about the tight credit conditions.

Commercial paper is a short-term funding instrument of US corporates (including financial and non-financial) for typical maturity periods of 3 months, which could be unsecured or asset-backed. The current outstanding commercial paper stands at around $1.1 trillion (Chart 1). The Treasury will provide a maximum of $10bn to the Fed to insure against potential credit losses.

Source: https://fred.stlouisfed.org/series/COMPOUT/ (Chart 1)

The Fed is directly purchasing the bulk of the volume of commercial paper due to the market strains. Even though the Fed only purchases commercial paper with a rating of at least A-1/P-1/F1, the required rating in fact represents the vast majority of the outstanding US commercial paper market. In 2008, the required rating represents around 95% of the entire credit markets.

In 2008, the assets of CPFF grew rapidly at inception, reaching $144 billion during the first week of operation. Assets more than doubled, to $293 billion, after one month and totaled $333 billion by the end of December 2008 (Chart 2). CPFF peak usage occurred in the third week of January 2009, exactly three months after the first issuance date, with approximately $350 billion in commercial paper held in the SPV (Special Purpose Vehicle). Throughout 2009, CPFF usage levels steadily declined, reaching a level of around $10 billion in December.

Source: https://www.newyorkfed.org/medialibrary/media/research/epr/11v17n1/1105adri.pdf (Chart 2)

The CPFF indeed had a stabilizing effect on the commercial paper market. At its peak in January 2009, the CPFF held more than 20 percent of all the outstanding commercial paper issuances. By the time it expired on February 1, 2010, the facility represented only 1 percent of market issuance (Chart 3). The self-liquidating feature of the CPFF is illustrated by the steady decline in the amount of outstanding commercial paper issuances throughout 2009.

Source: https://www.newyorkfed.org/medialibrary/media/research/epr/11v17n1/1105adri.pdf (Chart 3)

In addition to the relaunch of CPFF, the Fed has also introduced a new facility called PDCF (Primary Dealer Credit Facility), which is only open to primary dealers, and allows them to use investment grade bonds, ABS (Asset Backed Securities), MBS (Mortgage Backed Securities), commercial paper, and even US equity securities as collateral for funding from the Fed, for a term of up to 90 days, and at a funding cost of 0.25%. This could increase the marginal attractiveness of US equities as they are now viewed as Fed-approved collaterals. However, primary dealers, mostly large US banks, are not really lacking of short-term funding as we previously said.

Meanwhile, investment banker Steve Mnuchin said “We are looking at sending checks to Americans immediately”. This echoes Republican Senator Mitt Romney’s proposal of sending every American adult $1,000, which gives rise to a cost of around $250 billion.  Democratic Representatives Tim Ryan and Ro Khanna have proposed giving at least $1,000 to every American making under $65,000, and as much as $6,000 to some families with children.

Mnuchin hinted that the checks could be bigger than $1,000 but did not clarify if it applies to every American adult, or every adult and child, or if every adult and child below a certain income threshold, would get the benefit. However, he did say, “We don’t need to send people who make a million dollars a year checks,” implying that the checks will be means-tested to some degree.

This could be part of a broader emergency stimulus package of $850 billion that the Trump administration is seeking, according to street rumors. It will also reportedly include a tax break for wage earners. Rumors have also pointed out that the White House intends to have the package approved by Congress by the end of the week.  Another piece of good news is that Senate Democrats have also proposed their own stimulus package worth around $750 billion (to boost hospital capacity, to provide unemployment insurance and other direct aid for American households, businesses and the healthcare industry) on Monday. We will see whether Congress can quickly react.

This could be the beginning of what Ray Dalio calls monetary policy phase 3, which combines monetary and fiscal policies. US is right down the path.  We do not know yet the details of Mnuchin’s plan, perhaps we have to wait for 2 weeks for them to be unveiled.

These measures are expected to pump more liquidity into the economic system, which will ultimately benefit Bitcoin’s price. We see this liquidity and credit ease as a good sign for Bitcoin.