Our political leaders have agreed in terms to a massive stimulus package to help combat the damage the Coronavirus is raging against the United States economy. The deal that was settled late Tuesday night still must be voted upon by both the House and Senate. When that vote will be, is still up to debate as many are saying as soon as later today to later this week. The deal included $2T in stimulus and $4T of liquidity provided by the Federal Reserve. One major reason for the $4T in the stimulus package is for the Federal Reserve to provide liquidity to banks that are seeing a drawn in credit lines by corporations around the country.
According to Bloomberg news, here are some of the provisions:
- Big Businesses: About $500 billion can be used to back loans and assistance to companies, as well as state
- and local governments.
- Airlines: $25 billion in strings-attached grants and $25 billion in loans to passenger carriers, $3 billion to airline contractors providing ground staff such as caterers, while cargo haulers would see $4 billion in grants.
- Small Businesses: More than $350 billion to aid small businesses.
- Hospitals: A $150 billion boost for hospitals and other health-care providers for equipment and supplies.
- Individuals: Direct payments to lower – and middle-income Americans of $1,200 for each adult, as well as $500 for each child. Senate Minority Leader, Chuck Schumer, said checks would be cut April 6.
- Unemployed: Unemployment insurance extension to four months, bolstered by $600 weekly. Eligibility would be expanded to cover more workers.
- Restrictions on Business Aid: Any company receiving a government loan would be subject to a ban on stock buybacks through the term of the loan plus one additional year. They also would have to limit executive bonuses and take steps to protect workers.
The stock market has responded favorably to the news thus far with the Dow rallying over 11% from the day before. More importantly, corporate bond spreads have tightened (decreased) since the news has been released. We have been monitoring corporate bond spreads at The CICA since the beginning of the crisis. According to the St. Louis Fed FRED data, the ICE BofA US HY Index Option- Adjusted Spread closed at +403 (https://thecica.com/weekly-report-recap-week-of-january-27th-2020/). This means that the difference in yield of Treasury securities and HY debt of similar maturities averaged 4.03% higher. A simple example would be, if the most recently auction 5-year US Treasury is yielding 1.5% and the BofA HY index is +403, the average 5 year HY is yielding 5.53% (4.03 + 1.5). As spreads increase, the ability of some corporations (especially high yield companies’) to service their debt decreases. Yesterday, the BofA HY closed at +1,113, or 11.13% according to St. Louis FRED, meaning that if the 5-year US Treasury is trading at .55%, the average HY is 11.68%. A move from +403 to +1,113 means that the market value of the bonds for HY companies has substantially decreased and the amount of real dollar output to service their debt payments has substantially increased. However, after the announcement of the stimulus deal the price of the HYG ETF is up over 5% (when the price of the ETF increases it means the price of their bonds has also increased and the spread has decreased) which, suffice it to say, is good news. One update that we will be monitoring going forward is the price yield of 1-mo and 3-mo Treasury -Bills that have been trading at negative rates. As a former Bond/Money Market Mutual fund manager this can be potentially problematic for investing cash on hand. It also can increase the demand for repurchase agreements which has already been stressed since the beginning of the year.