Federal Reserve Sets Commercial Paper Backstop, Adds $500 Billion in Overnight Repos; Stocks Surge

The Fed will provide a $10 billion backstop to the commercial paper market, on top of the $1 trillion in overnight liquidity it's pumped into banks over the past two days.

The Federal Reserve pledged to support yet another portion of domestic credit markets Tuesday with a $10 billion backstop designed to help liquidity in commercial paper trading.

The Fed said it will create a so-called special purpose vehicle, under the direction of the Treasury, to buy short-term, high-quality unsecured debts issued by companies that form an important part of the overall financing system's credit markets.

The move followed an earlier injection of $500 billion into overnight repo markets, taking its two-day overnight total to $1 trillion, as concerns over liquidity in the banking sector continue to concern investors as economic activity dries up amid the global coronavirus pandemic. 

The Fed said the $1.14 trillion commercial paper markets have been under "considerable strain" in recent days as a result of "great uncertainty" from the outbreak, and Treasury Secretary Steve Mnuchin said the Fed could buy as much as $1 trillion in outstanding paper, if needed, but doubted such a sum would be required. 

"Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies," the Fed said in a statement. "By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy."

U.S. stocks traded higher following both the Fed's CP program announcement and its second overnight repo operation, with the Dow Jones Industrial Average rising 310 points and the broader S&P 500 adding around 103 points, or 4.3%, from last night's close.  

The liquidity injections also added strength to the U.S. dollar, with the dollar index, a measure of the greenback's strength against a basket of six global currencies, rising 1.6% to 99.66