“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” – James Carville
The Federal Reserve Bank’s Term Asset-Backed Securities Loan Facility (TALF) program begins this week as Federal Reserve Bank names BlackRock Investments and Pimco Investments as its program administrators. TALF is a bold program in which the Fed uses its balance sheet to buy publicly traded securities in an effort to support the broad market and prices. Investments common among retail investors such as ETFs or Exchange Trade Funds are eligible for the program.
The reason for the program is that the corporate bond market now stands at record levels. Business debt issued over the last 10 years pre- COVID-19 has risen into the trillions of dollars. Investment grade bond issues are those maintaining a credit rating from AAA to BBB. A significant percent of this total outstanding debt, 53% of investment grade debt according to S&P Global, is now subject to possible credit downgrades post COVID-19’s massive economic disruption.
When investment grade bonds fall below investment grade quality or below BBB, investors such as pension funds and insurance companies may start to sell these bonds at once, possibly causing price drops and market illiquidity that could spread to other assets in the bond market. TALF intends to prevent some of these bonds from becoming “Fallen Angels,” as they are nicknamed.
The chief architect of TALF is Federal Reserve Chair, Jerome Powell, who yesterday, May 13, stated publicly that our economy’s path ahead is “highly uncertain and subject to significant risks”. We now wait anxiously for Congress to pass a third round of Relief Legislation, this time to assist State and Local government budgets deal with the overwhelming deficits due to the crisis.