ECB and Fed flood markets

Focus: ECB and US Fed measures, Eurozone PMIs

ECB and Fed flood markets

The measures taken by central banks to counteract the economic downturn have been gathering considerable momentum for a good week now. We have listed the individual measures below. In summary, the central banks are opening all the floodgates and there will be a massive flood of liquidity. This will make it easier to finance the governments' forthcoming fiscal packages. We therefore do not believe that recent increases in government bond yields, out of concern over rising financing pressure, will continue. However, should yields actually continue to rise, the central banks will step in to keep financing costs low and thus keep the economy going. The measures already planned by the ECB and the US Fed will cause balance sheet totals to swell significantly, or, in the case of the Fed, the balance sheet has already risen significantly. If the coronavirus crisis stabilizes, which we expect to happen in the coming weeks as a result of the countermeasures taken by governments, this liquidity should push yields on German and US government bonds down again.

Here is a chronological overview of the measures taken by the ECB and the US Fed since March 12:

ECB

• At the regular meeting of the ECB Council on March 12, additional LTROs, i.e. long-term refinancing operations, were announced. Until June 8, these repos will be held weekly, on Mondays. These repos are intended to bridge liquidity needs until TLTRO III in June and all of them mature on June 24. Then there will be the possibility to transfer the funds raised into TLTRO III.

• Furthermore, the ECB decided to use a further EUR 120bn for securities purchases by the end of the year, in addition to the existing monthly purchases of EUR 20bn. The aim is to ensure a strong share of private issuers.

• At the same meeting, the interest rates for TLTROs were then lowered by 0.25% for one year (June 2020 - June 2021) and achieving the lowest interest rate (deposit rate -0.25%, in any case not higher than -0.75%) was made easier. The maximum borrowable volume was increased from 30% to 50% of eligible loans. This increase has already applied to TLTRO III this week.

• Banks were allowed to reduce their liquidity buffers and the criteria for eligible equity capital were relaxed.

• On March 15, the ECB participated in a concerted action to provide additional dollar liquidity. The ECB (and other major central banks) is offering on weekly basis 84 days maturity in addition to the 1- week maturity for dollar liquidity starting this week. Furthermore, the interest rate has been reduced from OIS (overnight indexed swap) +50bp to +25bp.

• This week, on March 18, the Governing Council decided on a new EUR 750bn PEPP (Pandemic Emergency Purchase Program), which is to last at least until the end of the year. The securities to be purchased will be the same as under the existing APP purchase program. In addition, Greek government bonds can also be purchased under the PEPP. There is no fixed monthly distribution of purchases.

• In addition, changes have been decided upon for the existing CSPP (Corporate Sector Purchase Program), so that money market securities of private issuers with corresponding credit ratings can now also be purchased.

• The Governing Council of the ECB is prepared to change the amount of securities purchases, their composition and duration of purchases to whatever extent is necessary. Any self-imposed restrictions that hamper the implementation of the measures will be amended to as necessary. This obviously relates to issuer and issuance limits.

US Fed

• Last week, a number of additional repos were already announced by the Federal Reserve Bank of New York. Starting last week, weekly 1- and 3-month repos will be held until the end of the month. The maximum volume is USD 500bn each.

• On Sunday, March 15, the FOMC decided in a meeting held three days earlier than planned to cut interest rates by 100bp, so that the range for the key interest rate is now 0-0.25%.

• In addition, securities purchases of at least USD 700bn (USD 500bn Treasuries, USD 200bn mortgage bonds) were announced over the coming months. Ongoing repayments of mortgage bonds will now be fully reinvested in these securities. Previously, the amount was capped at USD 20bn per month and the rest was reinvested in government bonds.

• At the same time, the Discount Window rate was reduced by 150bp, reducing the premium over the upper end of the Fed Funds Rate target range from 75bp to 25bp. The Fed's Discount Window grants short-term loans (overnight) to banks. In the course of the most recent measures, banks are now also being offered loans with a maturity of 90 days, renewable daily.

• Under the CPFF (Commercial Paper Funding Facility 2020), the Federal Reserve of the New York Fed will purchase dollar-denominated money market paper from issuers with a corresponding credit rating via a special purpose vehicle. The price paid will be the 3-month OIS plus 200bp. The program is scheduled to run for one year.

• Under the PDCF (Primary Dealer Credit Facility), loans are made available to primary dealers (the largest dealers in US government bonds) at the Discount Window interest rate. The term is up to 90 days.

• Through the Money Market Mutual Fund Liquidity Facility, the Federal Reserve Bank of Boston will provide loans to financial institutions to purchase money market paper from appropriate funds. This should enable the funds to easily manage outflows. The interest rate for the best category of securities is that of the Discount Window, for all others it is plus a premium of 100bp. This program is scheduled to run until the end of September.

• Finally, the Fed has also made additional liquidity available to other central banks for at least six months via swap lines. For six central banks this amounts to USD 60bn each and for three others it amounts to USD 30bn each.

Eurozone – Collapse in sentiment expected in March

Next week's flash estimate of Eurozone, Germany and France PMIs will show a sharp drop under the influence of the COVID-19 crisis. The ifo business climate index, which was released earlier this week, has especially dropped in the retail and manufacturing sectors. From an economic standpoint, the key question is how long the current strict quarantine measures will have to be maintained. Therefore, all economic forecasts are currently subject to high uncertainty. In this context, medical advances now play an important role in future economic assessments. Reliable, rapid tests, which would be available everywhere, or effective medication to prevent serious disease progression, could help to more quickly relax the strict quarantine measures currently required.

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