Yale School of Management

Posts by Market Commentary

Use of Federal Reserve Programs

May 7, 2020

The Federal Reserve recently announced a number of lending facilities, based on programs first implemented during the Global Financial Crisis of 2007-09. This post provides an update on the use of Fed lending programs since April 16. It also introduces the Fed’s newest lending facility, the Paycheck Protection Program Liquidity Facility (PPPLF); discusses international use of the Fed’s liquidity swap lines; and provides an overview of similar lending programs in Europe and the United Kingdom. Our previous post on the early use of Fed programs is available here

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A Long Way to Go for Emerging Markets

April 27, 2020

The developing world will soon become the frontlines in the battle against the coronavirus, and markets are bracing for the resulting fallout. The Covid-19 crisis has already had an unprecedented effect on emerging markets—more than 100 of the IMF’s member countries have already asked for aid: Simultaneous health and financial crises add fuel to the linkages between sovereign debt crises, banking crises, and growth and competitiveness crises. In this note, we discuss financial markets’ responses in the first months of the current crisis, the unique challenges EMs face compared to wealthier nations, and reasons for cautious optimism at the present moment.

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Early Use of Federal Reserve Programs

April 22, 2020

After the COVID-19 crisis began, the Federal Reserve quickly announced a number of emergency lending facilities, largely based on programs it first introduced during the Global Financial Crisis of 2007-09 (GFC). These programs have varied in size and speed of implementation. Bank reserve balances at the Fed have reached a historic high in recent weeks, exceeding $3 trillion for the first time, suggesting banks could lend much more.

This post discusses the early use of the following Fed lending programs: (1) primary credit through the discount window, (2) central bank swap lines and FIMA repos, (3) the Money Market Mutual Fund Liquidity Facility (MMLF), (4) the Primary Dealer Credit Facility (PDCF), and (5) the Commercial Paper Funding Facility (CPFF). 

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Fed Actions Help Agency mREITs Step Off the Liquidity Roller Coaster

April 22, 2020

Recent weeks have been a rollercoaster for mortgage real estate investment trusts (mREITs). Problems in funding markets led to quickly falling stock prices for mREITs through March, although they have stabilized in April. In this note, we discuss the business model of the roughly $700 billion mREIT industry, how that model has come under pressure during the COVID-19 crisis, and the differential effect of the Fed’s actions across the industry.

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Flight from Maturity during the Coronavirus Crisis

March 26, 2020

The coronavirus crisis has caused significant turmoil in funding markets in recent weeks. Although the Fed unveiled an alphabet soup of aggressive lending programs across many markets, a flight from maturity continues across many money markets, including interbank Eurodollar funding and commercial paper (CP). Although the current crisis is a pandemic—not yet a financial crisis like 2008—short-term debt holders are ready to run, should something appear to threaten issuers’ ability to pay. 

Unlike a flight to quality—in which lenders entirely shift to the highest quality safe assets like Treasurys—a flight from maturity occurs when lenders preserve the option to exit quickly by lending at shorter maturities. Risk builds and funding structures grow precarious as lenders place a larger and larger premium on the exit option.

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The FHLBs May Not be the Lenders-of-Next-to-Last Resort during the Coronavirus Crisis

March 24, 2020

During the global financial crisis, the Federal Home Loan Banks (FHLBs) were the lenders of “next-to-last” resort, as banks and other FHLB members preferred to use their funding rather than the Federal Reserve’s discount window, the traditional lender of last resort (LOLR). Banks felt using the discount window might stigmatize their image with other market participants.

But it’s unclear whether the FHLBs will play that role this time. Market data suggest that banks are turning to the Fed—partly because the stigma of using the Fed is reduced, partly because of pricing.

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