Below, we excerpt from comments from Calvert Asset Management Company's most recent "Focus On Fixed Income" publication, written by Calvert's Fixed Income Strategist and Money Fund Portfolio Manager Steve Van Order. Calvert discusses the myriad support programs in place to assist the money markets. Van Order says in today's commentary, "Government intervention is intended to cushion this painful adjustment and counter the contraction in credit that resulted from the failure of the 'shadow banking system' with the heavy collateral damage done to the traditional banking system."
In a section entitled, "Fed Monetary and Credit Policies: Keep 'em Liquid and Low," he says, "The goal of Fed policies this year will be to maintain and expand on gains in liquefying money markets and lowering long-term interest rates. The collapse of Lehman in early September immediately deepened the financial crisis with a fresh liquidity shock to the money markets. After Lehman failed, perhaps the Fed saw a bad parallel with the failure of the Bank of the United States in late 1930.... Bernanke, sought to avoid the mistakes the central bank made early in the Depression."
Van Order continues, "As we start 2009, the Fed has deployed a vast array of tools and we expect those tools to be variously expanded and enlarged or contracted and retired. The new TALF asset-backed financing facility is a $200 billion SPV capitalized by Treasury. It should be heavily used, as it will offer any institution or individual the ability to get one-year low-cost financing for any AAA-rated asset-backed security. If credit markets remain frozen, the Fed is likely to broaden the range of collateral and perhaps go down in credit quality in TALF. Purchases of agency debt and RMBS will temporarily replace the decimated investor base in that sector."
"The Fed already owns nearly 20% of outstanding commercial paper and will buy more if issuers are unable to find enough buyers out the CP curve. Money market funds will remain propped with the MMIFF. The AMLF facility, created to provide a selling outlet for money market funds hung with ABCP post-Lehman, will continue to wind down as the paper held in that facility matures. Central banks had success pushing down interbank lending rates in Q4 and will keep the global system flooded with dollars to keep them there. Facilities, such as TAF, TSLF and agency term repos, used to relieve Street bond inventory pressures, will remain in place and expand if needed, although there is evidence of less reliance on these than earlier in 2008. The Fed may create more Maiden Lane LLC's to further unwind AIG problems," Calvert's Focus on Fixed Income says.
Van Order adds, "With these facilities the Fed has given the credit market patient many medicines and they will continue to work. Money market liquidity and short term funding have improved and should further improve in 2009." Finally, Calvert's publication includes a helpful "Glossary of Fed Liquidity and Credit Facilities," which includes: AMLF - Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility, CPFF - Commercial Paper Funding Facility, MMIFF - Money Market Investor Funding Facility, PDCF - Primary Dealer Credit Facility, TAF - Term Auction Facility, TALF - Term Asset-Backed Securities Loan Facility, and TSLF - Term Securities Lending Facility.
