Coronavirus News Asia

Liquidation wave sinks markets as Senate bickers

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US equity indices were down about 3% mid-afternoon, despite an unprecedented commitment by the Federal Reserve to buy unlimited quantities of virtually all categories of debt securities as well as corporate-bond ETF’s. The Fed’s measure failed to impress markets after Senate Republicans and Democrats failed for a second day in efforts to pass an equally unprecedented $2 trillion bailout bill.

The Fed’s new intervention is less an intravenous tube than a fire hose. But it has not yet succeeded in stabilizing markets for high-quality securities that form the bedrock of the financial system. High-quality commercial paper with a AA rating, the short-term obligations of major corporations, usually yields a few hundreds of a percent more than Treasury bills.

Today the spread between AA commercial and Treasury bills shot up to 2.12%, approaching the 2.7% level touched during the 2008 financial crisis. Even large corporations may lose access to the short-term public borrowing market. The blowout in commercial paper spreads occurred after the Fed announced a special facility to buy commercial paper for its own account, in effect lending directly to corporations.

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