Financial Industry Insights from Advisors Asset Management


Liquidity Measures

The Fed moves to unclog liquidity

This week the Fed announced a liquidity “bazooka” to ease coronavirus-related liquidity strains within the banking system and U.S. Treasuries (normally the most liquid assets in the world). 

The measures offered up to $3.5 trillion of liquidity into the financial system this month. It involved: two 3-month $500 billion repo operations and an additional 1-month operation. Furthermore, weekly 1-month and 3-month operations will continue for the rest of the month. 

The Fed cited “highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak” for the decision. Banks, dealers, corporate treasurers and other investors had begun hoarding liquidity by fully drawing down revolving-debt facilities. This tightened liquidity in the banking system and caused trading costs in off-the-run Treasuries to widen substantially.

In our view, this is not reflective of the health of the U.S. banking system – which we believe is in robust shape overall.  Given the Fed’s essentially unlimited ability to do repo operations, we also believe that it has all tools at its disposal to prevent a liquidity crisis, and it is signaling that it will use them to prevent one. We expect the measures will significantly reduce the strain on bank balance sheets and help trading normalize in Treasuries.

QE (Quantitative Easing) has also essentially returned

The other announcement was that the Fed’s existing liquidity program ($60 billion in monthly Treasury bill purchases) will change. Now it will be used to purchase bonds across the entire Treasury curve “to roughly match the maturity composition of Treasury securities outstanding.”

Although it was not explicitly presented as such yet – this is essentially a resumption of quantitative easing.

All eyes on next week’s Fed meeting

Although liquidity will likely normalize, wider asset markets responded with no more than a momentary “sigh of relief.” The S&P 500 and the Dow later suffered their lowest daily returns since the infamous “Black Monday” of 1987 (albeit that was twice as severe).

As uncertainty around the coronavirus impacts both the real economy and the financial system, the global policy response – both monetary and fiscal – is gaining more attention.

Next week’s FOMC (Federal Open Market Committee) meeting will offer greater clarity on the future of U.S. rates, QE and liquidity operations. Markets are now close to pricing in an entire 100 basis point cut, which would take the lower bound of the Fed’s target range all the way to 0%. For now, an accompanying fiscal “bazooka” may be further off.

Stay diligent, and keep an eye on emerging opportunities

We believe investors can best navigate the current market by keeping sight of their long-term objectives and remaining calm as they prepare for more potential volatility.

From a credit strategy perspective, investors should closely monitor companies’ liquidity positions and financial flexibility, which have the potential to offer a buffer against further volatility and/or economic downturns. Some companies may be relatively insulated from the economic impact so we would carefully consider fundamentals and seek to avoid forced selling.

Furthermore, the market selloff is creating potential value in certain areas. Once greater clarity arrives and the dust settles, compelling opportunities may present themselves.


CRN: 2020-0302-8074 R

The opinions and views of this commentary are that of Insight Investment and are not necessarily that of AAM.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



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