Context for the Bounce
March 25, 2020
The most significant piece of the $2T US fiscal stimulus is the $400B Treasury Exchange Stabilization Fund, which the Fed can lever to ~$4T. Anticipation for the ESF compressed high yield credit spreads by 154 bps to 717bps. High yields spreads narrow further today by 80bps to 637bps. That’s good news for markets, but we expect to stay wide spreads/tight financial conditions until US case rates decelerate and/or the price of crude oil goes higher. Note high yields spreads in mid-February were ~290bps. Reports of the White House brokering a price war ceasefire between Saudi Arabia and Russia continue to surface, but unlikely to gain traction in credit markets until it happens. Cash grants and loans for the airline industry are included in the bill, but still unclear if the government will be getting any equity from any recipients. Another ~$367B of the $2T is set aside for forgivable small business loans provided certain payroll conditions are met. More: 1) ~$150B to state/local governments; 2) ~$130B for hospitals and; 3) many Americans will receive $1200 checks and $500 per child. The complete text of the bill will be released later today and expected to be signed by Friday. Net/net, there seems to be plenty of direct fiscal stimulus to surpass our ~4% GDP threshold for a 10-25% bounce in equities. Keep in mind, we saw almost 10% yesterday.