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Bloomberg News - November 2020

Mnuchin’s Efforts Are Seen as Having Muted Impact on Credit 2020-11-20 By Lisa Lee and Sally Bakewell (Bloomberg) -- Money managers and strategists see credit markets as being more exposed to shocks as U.S. Treasury Secretary Steven Mnuchin tries to wind down some Federal Reserve emergency lending and backstop programs that support corporate bonds. In the near term, Mnuchin’s efforts will likely have only a muted impact, because the facilities are rarely used now, according to portfolio managers and analysts. Below are comments about what Mnuchin’s efforts mean for credit markets: Patrick Leary, Chief Market Strategist at Incapital “Mnuchin is right that they were under-utilized, but it was the psychological backstop that the Fed was there in case something happened. It does take away the psychological backstop that kept investors bullish on credit. “The reality is that if things start getting crazy and spreads start widening, the Treasury Secretary can re-authorize the Fed to open the facility again: it’s still there; it’s been created now. That doesn’t mean we couldn’t see credit and muni spreads leak somewhat wider on this. “We should look at what has been done under that backstop: another $40 billion of bonds were sold this week bringing the total issuance this year to $1.7 trillion, an astounding figure. A lot of IG companies have used that to pay down revolving credit facilities and get their balance sheets in order. That means companies may not have such a need as we go into 2021, assuming the vaccine comes in to play and the economy gets back on its feet. So supply should dry up which may balance any widening. “It’s more of a confidence thing for the market, given it may not be the best time with virus surges and shutdowns, but it’s not like these facilities are being used to support market functioning any more.” David Knutson, Head of Credit Research, Americas, Schroder Investment Management “I was shocked. After reading the news I honestly had a hard time sleeping last night. I felt like Tom Hanks when Wilson floated away. I could feel the heat from Connecticut of the midnight oil burning on Liberty Street last night and the market so far is treating the news similar to the election outcome; with cautious patience. Hopefully it is something the markets can look through until January 20th. The Fed is very focused on the Treasury’s gambit and it knows that there is a whiff of smoke at the theater. So far everyone thinks it is just a singed popcorn batch.” James DiChiaro, Senior Portfolio Manager at Insight Investment “Mnuchin is accurate that much of the funds allocated to support the corporate bond market were unused. However, a good part of the reason why the funds went largely unused was because investors knew that they were there if market volatility resurfaced. Now may not be the ideal time to signal to the credit market that it no longer needs the same degree of central bank support.” Steven Oh, Global Head of Credit and Fixed Income, Pinebridge Investments “The primary value of the programs is the signal and the availability of a backstop rather than the actual actions/purchases. The existence provides the market with confidence. “By removing the programs, the impact is more on sentiment and is therefore a poor outcome for an economy that is still facing near term uncertainties.” Citigroup Strategists Including Daniel Sorid, in a note “We see scope for investment-grade spreads to move 1 basis point to 5 bps wider in a more bullish interpretation of events, in which the market comes to believe that the programs could be reauthorized by the incoming administration; to 10 bps to 15 bps wider in a more bearish outcome in which the capital supporting the programs would be irrevocably retired and require a new act of Congress to be redeployed. The front-end of US IG is most vulnerable to widening/relative underperformance.” Noel Hebert, Director, Credit Research at Bloomberg Intelligence “I’m surprised because I thought the Fed would keep extending that leash. It could help take some of the mania out of the market, especially in high-yield bonds. “My estimate is that the Fed is worth 30 to 50 basis points today in IG, and north of 100 bps in HY. The threat that the programs are a check from Treasury away, and that maybe (Janet) Yellen is sitting in that Treasury seat, means we don’t retrace the whole of it. Maybe a healthy 10 to 15 bps in IG and double that in HY. It would still leave markets rich, but less extended.” Gershon Distenfeld, Co-Head of Fixed Income at AllianceBernstein “This was an unusual show of public discord between the Fed and Treasury. “My suspicion is that is that this move is more of a political one as it gives the Senate (assuming it remains Red) a massive amount of leverage over the incoming Biden administration because these programs cannot be restarted without new legislation. “What does this mean to markets? In the short term it is unlikely to matter much. These programs have not been used significantly because financial markets stabilized and have functioned without significant Fed activity through this channel. There is some risk that the withdrawal of the backstop may spook some investors, but I think it is unlikely that it will have a meaningful impact in the near term. “Over the longer-term, the potential impact ranges from a slight positive to a negative outcome depending on the evolution of the economy and financial markets and how Senate Republicans choose to use the funds and their newfound leverage. The good outcome would happen if the funds are used to increase the size of stimulus spending and help to get a stimulus program approved. “The bad outcome is if the economy weakens significantly and/or financial markets become less optimistic about the outlook. That would necessitate a backstop for these assets and the political constraint of having to get approval from the Senate could limit the Fed’s ability to respond quickly enough to prevent a bad outcome.” William Zox, Portfolio Manager at Diamond Hill Capital Management: “In the near term, we will have a new Treasury secretary in two months. Over the long term, that tool is still in the kit and the markets know that.” Chris Sullivan, CIO at the United Nations Federal Credit Union: “It is somewhat curious that Secretary Mnuchin requested the return of the unused portion for certain credit facilities including the TALF. Although very little of it was apparently used, the new resurgence of Covid nationwide suggests additional market stress could re-emerge after 31 December especially in the absence of large scale stimulus. The Fed itself indicated in a statement that the backstop should remain in place for as long as the risk from Covid remains. “If, by freeing up funds, Mnuchin meant to spur Congress to act on stimulus sooner, then, I think, one could be sympathetic to his reasoning.” KC Baer and Christopher Yanney, Co-Founders and Portfolio Managers at CKC Capital: Baer: Mnuchin’s decision “is going to take some time for credit investors to digest. But the market has gotten so used to support from the Fed, any cutback presents a level of uncertainty. Now is not the time to buy or sell based on that uncertainty, but to factor in risk to your calculations.” Yanney: “You have to pay attention to the largest driving forces moving markets, which is anything the Fed or legislation has done in the past. This is the first time where you’ve seen a move where one of the programs is being detracted, which is worth taking note. The market is still trying to sort through the information and adjust accordingly.” Ashish Shah, Co-CIO for Global Fixed Income at Goldman Sachs Asset Management: “The corporate bond market has healed and Fed balance sheet expansion continues to be broadly supportive for financial conditions.” Ken Monaghan, Portfolio Manager at Amundi Pioneer: “I think that the Fed did the heavy lifting that was required.” Gary Pollack, Head of Fixed Income, Private Wealth Management, Deutsche Bank “This is very disappointing, especially for weaker credits which are still facing the financial impact from the pandemic. On the other hand, the muni lending facility was not utilized that much because its interest rate was too onerous. But still it is a back-stop for those who need it.” Jack McIntyre, Portfolio Manager at Brandywine Global “I don’t think it’s that big a deal. Those funds weren’t being utilized so I suspect they want to come up with another way to get those funds directly to consumer and small business. “Maybe I’m missing something but don’t think it’s politically motivated. “Why lock up capital at the Fed when its not all going to be needed. “It (Covid) will get really bad. Deaths are going to increase - it’s spreading in nursing homes. However, I’m not sure markets are going to care. If you extend your time horizon by four months the vaccines are really going to be wide spread.” Ashok Bhatia, Deputy Chief Investment Officer, Fixed Income, Neuberger Berman “At the margin, it’s a small negative for credit markets. Some of these facilities were not used or barely used, so the economic impact is going to be marginal. These programs can also be re-authorized by Congress or potentially the Treasury secretary with the change of administration. However, it’s not a positive signal for markets that the Fed and Treasury are in disagreement.” --With assistance from Paula Seligson, Caleb Mutua, Gowri Gurumurthy, Joe Mysak, Davide Scigliuzzo, Charles Williams and Katherine Doherty. To contact the reporters on this story: Lisa Lee in New York at; Sally Bakewell in New York at To contact the editors responsible for this story: Natalie Harrison at Dan Wilchins, Claire Boston


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