QE Unlimited Finally Arrives

Today’s market felt like a roller-coaster. Initially it seemed very disappointing that the Senate failed to pass the rumored fiscal package vote of $2 trillion. We knew that the Senate has to do something to avoid the market collapse before US market opened. Finally, the Fed came with unlimited QE package which removed the purchase limits of treasuries and MBS (Mortgage-Backed Securities).

But what is really important, is that the Fed finally came in to directly purchase US Investment Grade corporate bonds, in both the primary market and secondary market.  The Treasury department will also inject $20bn as a guarantee to ensure against any potential losses incurred by the Fed’s corporate bond purchase operations. In addition, the primary market for individual corporate names, the Fed could purchase up to 110-140% of new bond issues of the outstanding amount for the past year, while in the secondary market, the Fed could purchase up to 10% of the outstanding amount of any individual investment grade name, or up to 20% of the assets of any investment grade bond ETFs (Exchange Traded Funds). These bold moves will definitely solve the issue of the big banks’ unwillingness to lend to corporates, and will ease market concerns on a possible credit crunch.

Next, in order to support the flow of credit to employers, consumers, and businesses, the Fed is establishing new programs that, taken together, will provide up to $300 billion in new financing. The Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $30 billion in equity to these facilities.

What is more, the Fed is committed to lend for a maturity of 3 years directly to US corporates with an account in a primary dealer against any highest-graded asset-backed securities with underlying assets such as 1) Auto loans and leases; 2) Student loans;  3) Credit card receivables (both consumer and corporate);  4) Equipment loans;  5) Floorplan loans;  6) Insurance premium finance loans;  7) Certain small business loans that are guaranteed by the Small Business Administration; or 8) Eligible servicing advance receivables.

The Fed has also lowered the price of the Commercial Paper Funding Facility (CPFF) by 90bp. The fiscal package should also get passed in the next few days, as the Democrats do not wish to be blamed for the failure of not passing the package. They just want to see the package’s priorities to shift more focus on SMEs, students and workers rather than big corporations.

While there still exists liquidity concerns on US money market funds and some big hedge funds, at least the Fed is endeavoring to provide all kinds of support needed to ease concerns. Bitcoin prices fell a bit tonight after a strong rebound, which is normal. But tonight’s news eases further liquidity concerns on Bitcoin, which paves the way for a further rebound after the Mt. Gox Day of March 31.