20/10/2020  The Federal Reserve’s Corporate Credit Facilities: Why, How, and For Whom - FEDERAL RESERVE BANK of NEW YORK  SPEECH  The Federal Reserve’s Corporate Credit Facilities: Why, How, and For Whom October 20, 2020 Daleep Singh, Executive Vice President Remarks at The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (delivered via videoconference) As prepared for delivery  Thank you, Tom, for the invitation to join this event. As all of you know, in March the Federal Reserve—with backing from the U.S. Treasury—created a set of facilities to purchase corporate credit for the first time in its history. Many observers have credited the facilities with repairing market functioning in the corporate bond market and restoring the ability of many businesses to finance themselves through the pandemic. But my focus today is not the corporate bond market, credit spreads, or Wall Street. Rather, I’d like to connect the dots by explaining why these facilities were necessary to support jobs and the economic recovery on Main Street, and why transparency, access, and accountability were so critical to their implementation. Before I review the initial success of these programs, I want to acknowledge the painful realities that many firms, employees, and households continue to face. For millions of Americans, it’s a long road back to normal. I should also make it clear that these remarks are my personal views and not necessarily those of the New York Fed or the Federal Reserve System.1 The Shock to U.S.
Research from the New York Fed estimates that, within the first three months following the CCF announcement, credit spreads retraced about 90 percent toward pre-pandemic levels, with two-thirds of the improvement occurring on facility announcement dates (i.e., before purchases even began), and that half of the improvement in bid-ask spreads since the peak in March occurred on the initial announcement date itself.14 This provides strong evidence that the market found credible the design the CCFs, as well as the Federal Reserve’s commitment to following through. Improvements in secondary market conditions pass through to corporate borrowing costs in two ways: directly through borrowing rates that are benchmarked to secondary market yields of similar bonds, and indirectly by increasing the willingness of dealers to underwrite bond issuance. And this is precisely what we’ve observed. Since the CCF announcement, firms have raised about $ trillion in the corporate bond market from investors, or about double last year’s pace. Companies have raised new funds and refinanced maturing debt, helping them to maintain their operations and payrolls and build liquidity buffers against continued uncertainty. Importantly, the dramatic improvements in credit conditions have come despite an extremely small CCF footprint that has decreased over time. On account of healthy primary markets, the PMCCF has yet to be tapped. And since mid-May, when we began SMCCF purchases, the pace of our buying has fallen steadily in response to improvements in market functioning.