New research from Gilchrist, Wei, Yue and Zakrajšek analyzes the impact the Fed's corporate credit backstop had on funding costs for large companies nber.org/papers/w27809

"The announcement ... influenced credit spreads by significantly reducing near-term default risk."
"The benchmark spread for investment-grade U.S. corporate bonds widened nearly 100 basis points—from already elevated levels—over the few days after [the announcement of the CPFF and MMLF] while the corresponding spread for high-yield bonds jumped 180 bps over the same period."
After the announcement of the corporate lending backstop, bonds below the five-year maturity cutoff experience a drop in credit spreads of 70 basis points, relative to investment-grade bonds above the five-year maturity cutoff, during the post-announcement period.
"Moreover, these effects occur relatively quickly—within 14 days of the April 9 announcement—and are long lasting."
"The total effect of the program announcement lowered credit spreads on eligible bonds by 20 basis points relative to ineligible bonds for an average issuer of both types of bonds."
"We consider all bonds issued by companies that were rated as investment grade before March 23 but were downgraded to a notch below investment grade during the subsequent 10 days and hence became SMCCF eligible with the April 9 announcement."
"When compared to the matched sample of ineligible bonds, fallen angels’ eligible bonds experienced a 340 basis point increase in credit spreads during the 10-day period following the March 23 announcement."
"We then show that the April 9 announcement reversed much of this run-up. In particular, credit spreads on newly eligible bonds issued by fallen angels fall 250 basis points in the ten days following the April 9 announcement."

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More from @NickTimiraos

5 Sep
Congress appropriated $500 billion to the Treasury under the Cares Act. $454 billion is to cover losses on Fed lending programs and the other $46 billion for airlines or businesses critical to national security 1/
Treasury committed $195 billion of the former slug of equity but hasn’t allocated the other $259 billion wsj.com/articles/454-b…
Of the second slug (the $46 billion) $17 billion must go to companies critical to national security. Of that, Treasury has made one $700 million loan, making for $16.3 billion that hasn’t been committed in addition to the $259 billion toomey.senate.gov/files/document…
Read 4 tweets
16 Aug
A Census survey said one in eight US adults lived in households at the end of July that didn't have enough to eat at some point in the prior week, up from one in 10 in May wsj.com/articles/more-…
Almost 20% of Americans with kids at home couldn’t afford to give their children enough food, up from almost 17% in early June
"There is a big problem here, and the problem seems to be worse than it was at the height of the Great Recession,” said Diane Whitmore Schanzenbach, a Northwestern University economist.
Read 4 tweets
17 May
In his interview with 60 Minutes, Fed Chairman Jay Powell pushes back on the idea that there’s a trade off between economic growth and public health safety.

“When the public is confident that it's safe to go out, they'll go out.” wsj.com/articles/feds-…
Scott Pelley asks Powell what he’d like to see for the economy on the back end of this crisis?

Powell: “We do need to be mindful of finding a way to a more inclusive prosperity in this country.”
Pelley: Is the Fed out of ammunition?

Powell: No way. On monetary policy, he says, “There are a number of dimensions where we can move to make policy even more accommodative.”
Read 7 tweets
9 Apr
NEW: Major expansion of Fed lending facilities
$500 billion for municipal credit
TALF expanded to include AAA CMBS and AAA CLOs
Corporate credit extended to include fallen angels
$600 billion for loans to midsize businesses
wsj.com/articles/fed-a…
The Fed says these programs will provide $2.3 trillion in lending, and they are supported by $185 billion in new Treasury support
Muni facility will purchase up to $500 billion of short term notes directly from U.S. states, District of Columbia, U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents.
Read 6 tweets
10 Mar
Countercyclical fiscal policy in the U.S. is relatively rare. The one example of it from recent downturns—Jan 2008—illustrates how a lot of different policy makers were engaged relatively quickly

A quick rundown since this history is buried under the ensuing financial crisis
The BLS reports on Jan. 4 that the unemployment rate rose in December to 5% from 4.7%. Meantime, stocks begin to fall (around 12% through the month vs late December) as banks like Morgan Stanley announce Q4 writedowns forthcoming on mortgage-related investments.
Economists begin calling for fiscal stimulus (Example: blogs.wsj.com/economics/2008…) Bernanke does, too, in testimony before the budget committee on Thursday, Jan. 17
Read 9 tweets
28 Jan
The Fed successfully flooded markets with cash late last year to avoid a spike in overnight lending rates. Now, officials have to decide when and how to wind down the program

A few considerations: wsj.com/articles/with-…
There's a debate over whether or not investors think the Fed's bill-buying binge is akin to 'QE'—either through portfolio balance effects, which many current and former Fed officials think is remote, or through harder-to-quantify means by boosting psyche and animal spirits
Maybe this debate matters because as witnessed with the confusion in December 2018 over the impact of balance sheet runoff ('QT'), what investors think can take on its own self-fulfilling properties. It could potentially complicate ending the latest purchases.
Read 13 tweets

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