The bond market is huge, vast beyond comprehension. There are treasuries, corporates, municipals, student loans, car loans, commercial & home mortgages, and on and on. The Covid-19 catastrophe froze much of these markets. Prices for the buying and selling of these debt securities disappeared. The world economy was at risk. Our government needed to step in hard and fast.
To deal with the economic shutdown caused by Covid-19, Congress passed The Cares Act. Among other things, it gave our Federal Reserve additional abilities. The Cares Act created and funded several ‘Special Purpose Vehicles’ (SPV). Our Federal Reserve will provide loans to these SPV’s to purchase a limited but full spectrum of corporate bonds, municipal bonds, and additional securities (ordinarily, our Federal Reserve is limited to dealing only in securities guaranteed by the U.S. Government).
Established prices for the buying and selling of debt securities is vital for our economy. By offering to buy a full range of debt securities, these SPV’s will hopefully restore the bond markets to normal functioning again.
Before The Cares Act Announcement, the prices of corporate bonds dropped hard and mortgage backed securities not backed by the U.S. Government followed. Then the announcement of the Federal Reserves’ pending new powers through the SPV’s created by The Cares Act unfroze the bond and credit markets. Corporate bonds, municipal bonds, and mortgage backed securities recovered. Prices went straight up after going straight down. And, as expected, stock prices also started to recover.
-Cliff Jarvis