The US Federal Reserve took new action on Tuesday night to shore up financial markets by allowing approved dealers in government debt to borrow cash secured against some stocks, municipal debt and higher-rated corporate bonds.
The Fed said in a statement that the facility would “allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households” in the face of the coronavirus outbreak.
The new facility will offer funding with maturities up to 90 days starting on March 20 and be in place for at least six months. Credit extended under the new facility for primary dealers would be collateralised by a “broad range” of investment grade debt, including commercial paper, municipal bonds and equities. The interest rate charged would be the discount rate of 25 basis points.
The new facility was established with the approval of Steven Mnuchin, the US Treasury secretary. “The global coronavirus outbreak has contributed to significant financial market volatility,” Mr Mnuchin said in a statement, adding that the move would “help address illiquidity, mitigate disruptions in funding markets, support smooth market functioning and help facilitate the availability of credit to American workers and businesses”.
Investors have complained about dysfunctional markets in recent weeks, with the buying and selling of a range of assets, from corporate bonds to US Treasuries, being plagued by problems.
There are 24 primary dealers, including Wall Street giants like JPMorgan Chase and Morgan Stanley, as well as international investment banks like Barclays, BNP Paribas and Deutsche Bank and some smaller firms like Cantor Fitzgerald and Amherst Pierpont Securities.
The announcement comes just hours after the US central bank unveiled other measures to address strains that have cropped up in short-term funding markets in the face of widespread financial volatility.
Earlier on Tuesday, it unveiled its most sweeping measure to date to shore up corporate America, agreeing to buy commercial paper through a facility last deployed during the financial crisis over a decade ago.
Borrowing costs in the $1.1tn commercial paper market, where companies raise short-term cash, had soared in recent weeks, causing the market to freeze up and prompting some apprehensive companies to draw down credit lines from their banks to shore up their liquidity.
Later on Tuesday, the Fed said it would once again ramp up its interventions in the repo market, offering up $500bn in overnight loans twice daily through the end of the week. It has already committed to pump trillions of dollars into the repo market, where investors swap high-quality collateral like Treasuries for cash.
These efforts follow a series of emergency measures enacted by the Fed on Sunday, when the central bank slashed its main policy rate to zero, announced at least $700bn in asset purchases, and co-ordinated action with other global central banks to lower the cost of borrowing dollars internationally through existing swap lines, among other actions.