STREETWISE: Federal Reserve chair, Treasury secretary no longer in synch

It appears that the synergy between Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin in combating the fallout from the coronavirus pandemic has evaporated.

In what might be an unprecedented squabble between two of the nation's most prominent economic leaders, Mnuchin sent a letter to Powell on Nov. 19, stating he would let certain emergency lending facilities created by the Coronavirus Aid, Relief, and Economic Security Act expire on Dec. 31.

He is of the opinion that is what Congress had intended. He has therefore requested that the Fed return almost $200 billion of unused funds to the Treasury, which would then, "allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds."

The Fed responded almost immediately with a short statement: "The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy."

And it starts. At stake is the future of the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, and the Term Asset-Backed Securities Loan Facility.

At the same time, Mnuchin requested a 90-day extension of the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Liquidity Facility, and the Paycheck Protection Program Liquidity Facility.

I would concur that is would be a mistake to let the facilities for municipal bonds and small businesses expire, not just because their finances are the most imperiled by the pandemic but also because these programs are hardly used in the first place — a backstop in every sense.

Those for corporate debt, on the other hand, do not seem quite as necessary given that junk bond yields are near a record low and the investment-grade markets are wide open.

Mnuchin argues in his letter that the facilities "have clearly achieved their objective," rattling off municipal-debt issuance figures, corporate-bond spreads, and rates on asset-backed securities. Still, the announcement flies in the face of Powell's long-held position — which was thought to be shared by Mnuchin — that "when this crisis is behind us, we will put these emergency tools away." The Covid-19 pandemic is only worsening across America, from rural counties to New York City.

If you are concerned over the recent announcement by Mnuchin that he is cancelling the emergency lending programs, here is some good news.

Corporate bond investors flooded Carnival Corp.'s bankers with more than $11 billion in orders for debt that comes with no collateral protection. That was a sign that credit markets are not as fragile as some may have thought.

After roughly $2 trillion of borrowing helped corporations bolster their balance sheets with cash to weather the pandemic, the Street appears to have become increasingly confident — perhaps even complacent — that the widespread corporate failures predicted by many earlier this year have largely been avoided. Granted, the Fed helped fuel nearly all that debt issuance, and the demand to support it.

And even if the immediate lifeline of $580 billion in backstop money is returned by the Federal Reserve to the Treasury, it seems that the Street is of the opinion that the markets will fare just fine, anticipating that the government will step in again if new signs of stress emerge.

Carnival Cruise Lines, a bellwether for companies hit hardest by the pandemic, raised about $9 billion through the issuance of bonds and loans backed by its idled ships earlier this year, some with coupons above 10%. Now the company is borrowing at a rate of 7.625% without pledging any assets, according to rumors on the Street.

Investors placed orders of more than $11 billion for the offering expected to be about $2 billion in size, including bonds in dollars and euros.

Note to Readers: I will be teaching Investment Analysis again for Ringling College’s Osher Lifelong Learning Institute beginning on Jan. 11. Call 941-309-5111 for registration/information.

Lauren Rudd is a financial adviser with Raymond James & Associates Inc., member New York Stock Exchange/SIPC, located at 1950 Ringling Blvd #401 Sarasota, FL 34236. Contact him at 941-706- 3449. This market commentary is provided for information purposes only. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected.