Last week and again this morning, the Federal government took actions to blunt the impact of the pandemic response on the U.S. economy. The actions have specifically targeted malfunctions in liquidity, money markets, and the credit markets. The details of each specific action are numerous and esoteric for this publication but will be briefly summarized in the following paragraphs.

The impact of the COVID-19 pandemic paired with a simultaneous oil price war created tremendous uncertainty in both the real economy and the investment community further exacerbated by unexpected trading patterns. While COVID-19 and the oil price war are likely familiar to most, the trading behavior may be less so. According to Bloomberg, unusual circumstances in a levered (meaning borrowing to invest) Treasury Futures and cash Treasury trade led to extremely high demand from unlevered investors who normally prefer commercial paper and foreign exchange forward contracts. These large unlevered investors sold securities to broker-dealers (BD), resulting in large balances held by the BDs and, ultimately, to a market dislocation. Essentially, liquidity was sucked out of the commercial paper market, vital for the normal functioning of the economy and typically highly liquid. Concurrently, the stock market experienced wild swings due to uncertainty of the economic impact of the pandemic, leading to tremendous pressure on banks and the investment community.

To grease the economic skids, the Federal Reserve introduced a litany of programs last used during the Global Financial Crisis of 2008. These include reducing interest rates, reducing bank reserve requirements, supporting the market for repurchase agreements, and pledging to purchase Treasuries, agencies, certain high-grade municipal securities, and tier-1 commercial paper (including asset-backed commercial paper). The desired impact is to continue funding the day-to-day operations of companies and governments while ensuring the smooth operation of the financial markets. The Fed’s actions have been well-received by many investors, but the Fed alone cannot resolve the economic turbulence. Congress and the Trump Administration are debating fiscal stimulus to support the economy, hoping to help reduce the impact of a probable recession. However, the greatest stimulus would be clarity on the length of the pandemic-inspired economic disruptions.

Given the tremendous volatility in the investment markets and the velocity of news flow, it can be difficult to understand the current investment climate. Public Trust understands these concerns and remains available for questions.