Fed is buying money market fund assets

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The Federal Reserve and its fellow central banks are pulling out all the stops to make sure the panic phase of this crisis is well and truly over. These kinds of moves are already having results as Libor and Euribor (the rate at whch banks lend to one another in Dollars and Euros) have come down significantly (see story).

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But, according to Bloomberg, the Fed has begun buying assets directly from money market funds in order to intermediate in this important credit market. This is very big news because money market funds have been having problems meeting redemptions.

We should see these latest moves as evidence that the Fed and other central banks are willing to do everything possible to prevent a credit crunch from turning into deflation and depression.

The Federal Reserve invoked emergency authority to purchase assets from money-market mutual funds that are having difficulty meeting redemptions from their investors.

“The short-term debt markets have been under considerable strain in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests,” the Fed said in a statement released in Washington today. The new program “should improve the liquidity position of money market investors.”

The Fed will lend to a series of special units that will buy certificates of deposit, bank notes and commercial paper with a remaining maturity of 90 days or less. The new effort is called the Money Market Investor Funding Facility, and is aimed at supporting a private-sector initiative, the Fed said.

“In terms of the redemptions money-market funds are seeing, and hedge funds as well, any of these moves by the Fed are going to help,” Mike Holland, chairman and founder of Holland & Co. LLC in New York, said in a television interview. “We are going to see those redemptions eased.”

The private special-purpose vehicles set up under the program being announced today will finance their purchases by selling asset-backed commercial paper. The New York Fed will also lend to the facilities on an overnight basis at the discount rate, which stands at 1.75 percent.

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Each special purpose vehicle will only purchase debt from ten financial institutions, and ratings on the securities will be at least A1/P1/F1. The Fed said the facility will be in place until April 30 unless extended by the Board of Governors.

The central bank already has two other facilities designed to provide liquidity to the commercial paper market and backstop money fund sales of asset-backed securities.
Bloomberg

Sources
Fed Sets Up New Program to Buy Money-Fund Assets – Bloomberg
Libor for Euros Declines to Lowest Level Since Lehman Collapse – Bloomberg
U.S. Moves Toward Stimulus as Bernanke, Bush Shift – Bloomberg

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