The Federal Reserve pumped $US1.5 trillion into the US financial system on Thursday to try and provide enough liquidity to ease the stress in short-term funding and US Treasury markets.
The US central bank is also making changes to its program of Treasury bond purchases to “foster smooth Treasury market functioning”. It will now buy other bonds on top of the billions of dollars of short-term T-Bills it has been dealing in now for months.
For the third time in four days, the Fed’s New York arm announced that it will increase the size of its lending in the repo market, where investors borrow cash in exchange for high-quality collateral like Treasuries — this time by multiples of the amounts previously on offer.
The NY Fed said it would offer $US500 billion in a three-month repo operation Thursday afternoon — and then will do the same thing on Friday tonight, Sydney time).
On top of this, the Fed said it will offer a $US500 billion one-month repo operation Friday and take additional steps as well.
The Fed said the dramatic moves will address “highly unusual disruptions” in the Treasury market linked to the coronavirus outbreak.
This accelerates the weeklong moves by the NY Fed aimed at easing fears that companies will lose access to capital or that markets will become unhinged.
Markets threatened to become unstable on Thursday.
Not only did stocks in Europe and the US nosedive on Thursday, but the ultra-safe government bond market malfunctioned on Thursday morning.
Even though Treasuries are supposed to be the safest assets on the planet, liquidity dried up in that market, setting off alarm bells on Wall Street.
“The market in a sense broke today. The Fed came out and fixed it,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group told CNN.
He said there was a “blow out” in the gap between bid and offer prices in Treasuries, which indicated an emerging liquidity crunch in what is normally one of the deepest and most liquid financial markets globally.
That was preventing deals being done and the liquidity crunch threatened to spread to other markets such as corporate bonds and equities, as it did in 2008 in the wake of the collapse of Lehman Brothers.
Meanwhile, dire forecasts are emerging for the US economy.
For example, Capital Economics said The US economy could contract by a whopping 4% in the June quarter in light of the European travel ban, the suspension of professional sports (such as basketball and ice hockey), a shutdown of the Broadway theatre district in New York, schools and businesses across the country.
The gloomy forecast is based on a rash of major closures involving schools, workplaces, sports leagues and venerated cultural institutions.
“As a result, we now expect GDP to fall by 4% annualized in the second quarter and to stagnate in the third,” wrote Andrew Hunter, senior US economist at Capital Economics.
