On Thursday, Mnuchin asked the Fed to return the unused funds from the care law. Basically, the Treasury extended some Fed programs, but asked that some programs expire on December 31.st as originally planned. The Fed, according to reports, prefers programs to be extended, and the amount of treasury money at stake appears to be in the neighborhood of $ 400 billion (just a rough summary).
For full disclosure, Academy Securities is involved in several of these programs (Academy is an eligible seller on the SMCCF for example).
The first reaction to these headlines was a “risk-free” movement. Certainly, practically all economists seem to say this is the worst thing that can be done. While I don’t want to take the other side of what economists are saying (ok, maybe I do), this announcement could play positively for the markets.
Against the bad and gloomy headlines, there are a few things we should all think about (and I’m staying bearish on stocks here, for a myriad of other reasons, but this Treasury / Fed news isn’t a big factor in me).
· The bond markets are working very well, and I suspect that little of that performance, at the moment, can be attributed to the Fed’s ongoing purchases. The Fed / Treasury literally “saved” the various bond markets in March and the continued support helps, but is not critical. Having the backstops in place (and I’m particularly supportive of the ability to buy ETFs to prevent any discount on NAVs from appearing and unlock another Spiral ™ ETF) is good and should be left in place, but it doesn’t It’s not critical whether this change is likely to end with a transition in Washington in January.
· The money is there until December 31st. It doesn’t go away tomorrow (if it goes away at all) and there is plenty of reason to believe that in January it could be reactivated. Plus, they don’t force the unwinding, they just asked for the unused money back.
· The Fed Can Buy Many Assets Without The Treasury’s “Stock” Investments. For programs like the SMCCF, the Fed has loaned money to the vehicle that is backed by a “equity” (or first loss) position provided by the Treasury. The Fed can buy many assets, like treasury bills, without any of that treasury money. If the Fed were worried, it could immediately increase its purchases of other assets, like Treasuries, to maintain the size of the balance sheet it deems appropriate. These purchases may not translate directly into munis and corporate bonds, but they certainly help.
Lots of mitigating factors.
Back on October 15e The Academy has written on Charlie Brown & Stimulus. Maybe, just maybe, Mnuchin is tired of getting the bullet shot at the last second and thinks that by taking that money out, either he can allocate it directly (or through the decree) and do something, or it will force the House. and the Senate to really get at least one “skinny” deal quickly.
With lockdowns increasing, although hopefully mitigated by COVID vaccines in the coming months, now is a great time to strike at least one ‘lean’ deal.
So maybe Mnuchin figured out a way to take the money straight out, or bet it forces the hand of Congress. I think maybe that’s what the economists who are harshly critical of this decision are missing.
In general, yes, I would prefer the money to stay with the Fed, but:
· Treasury currency is not critical to monetary policy or the markets at this time.
If withdrawing money can get some sort of stimulus (straight from Treasury or Congress), it’s worth it.
Stock prices may go down, but Mnuchin’s shares are not as dangerous as many seem to believe.