US equity indices were down about 3% mid-afternoon, despite an unprecedented commitment by the Federal Reserve to buy unlimited quantities of virtually all categories of debt securities as well as corporate-bond ETF’s. The Fed’s measure failed to impress markets after Senate Republicans and Democrats failed for a second day in efforts to pass an equally unprecedented $2 trillion bailout bill.
The Fed’s new intervention is less an intravenous tube than a fire hose. But it has not yet succeeded in stabilizing markets for high-quality securities that form the bedrock of the financial system. High-quality commercial paper with a AA rating, the short-term obligations of major corporations, usually yields a few hundreds of a percent more than Treasury bills.
Today the spread between AA commercial and Treasury bills shot up to 2.12%, approaching the 2.7% level touched during the 2008 financial crisis. Even large corporations may lose access to the short-term public borrowing market. The blowout in commercial paper spreads occurred after the Fed announced a special facility to buy commercial paper for its own account, in effect lending directly to corporations.
That is why St. Louis Federal Reserve President James Bullard warns that the unemployment rate might reach 30% during the second quarter and that economic activity might fall by half.
The Federal Reserve last week said it would buy $500 billion of US Treasuries and $200 billion of mortgage-backed securities. Today it removed the ceiling on prospective purchases, and added corporate bonds, municipal bonds, and commercial real estate mortgages to its shopping list. The spread between Treasuries and mortgage-backed and corporate bonds came in slightly, but still remains a multiple of normal levels.
Meanwhile, Senate Republicans and Democrats bickered openly on the floor of the Congress, and the Senate failed to reach an agreement on the $2 trillion emergency spending bill proposed by the Administration. At 1 p.m., just before news broke that the Senate remained at an impasse, the Dow Jones Industrial Average had recouped almost all of an early 5% loss. It plunged again after the Senate negotiations failed.
Republicans have a list of proposed subsidies for corporations that the Democrats don’t like, and the Democrats want an guarantee that corporations who receive aid won’t fire any workers. If the Senate doesn’t act quickly, the Democrat position will become moot as half of American workers lose their jobs. According to thehill.com, the Republican bill raises a “corporate bailout fund” to $500 billion.
A large share of the credit universe is in real distress, including high-yield debt issued by shale drillers now driven out of business by a $21 oil price, and real estate companies who own empty hotels and deserted shopping malls. The collapse of financing for high-quality, liquid debt is a bigger threat, however.
One of the sources of the avalanche of force sales is the $12 trillion overhang of foreign bank obligations to US banks, as I wrote in this space on March 13. During the past 30 years, foreigners have financed the cumulative US current account deficit by purchasing dollar-denominated US securities, and foreign banks have borrowed dollars in order to create hedges against dollar fluctuation for these investors.
The credit crunch in the United States has cut off interbank credit to foreign banks, who have to unwind the foreign exchange hedges. That, in turn, forces bank customers to sell securities. The $12 trillion size of these obligations is large enough to swamp the amount of money that the Federal Reserve is prepared to spend.
That is why direct spending by governments is so critical. Central banks, in theory, can print as much money as they like, but even the Federal Reserve can’t triple its balance sheet overnight without putting its own credit at risk. Markets have to expect a backstop for corporations before the run on credit comes to an end.
Mortgage rates are rising in Canada despite virus-relief cuts – BNNBloomberg.ca
Canada’s mortgage rates are creeping up — even though the country’s central bank has slashed borrowing costs to combat the COVID-19 pandemic.
That’s due to the “enormous pressure” Canadian banks face amid disruptions caused by the outbreak, said Sherry Cooper, chief economist at Dominion Lending Centers.
“The costs of funds for banks is skyrocketing and bank earnings are plunging,” Cooper said Monday in a phone interview. “Every single business they have ever loaned to is subject to a massive decline in revenues, and therefore their own revenues are going down because nobody is taking out new business with banks except to extend debt.”
The Bank of Canada has cut its overnight interest rate three times this month, bringing the benchmark to 0.25 per cent. The large Canadian banks matched those moves by cutting their prime rates, which influence borrowing rates for variable mortgages and credit lines, to 2.45 per cent from 3.95 per cent at the start of the month.
As those rates have dropped, banks have been eliminating discounts off prime on variable mortgages. At the start of the month, qualified borrowers could get a rate of prime minus 1 per cent from HSBC Canada, for example, while Canada’s large domestic lenders were also offering “prime minus” deals as well.
But those discounts have shrunk by 75 to 85 basis points, said Rob McLister, founder of mortgage comparison website RateSpy.com.
Typical five-year fixed rates at also rising. Rates at large Canadian bank are now at 2.99 per cent to 3.04 per cent versus around 2.49 per cent to 2.59 per cent at the end of February, McLister said.
“The big banks are leading the charge higher here, on both the fixed side and the variable side,” he said. Preferred borrowers can still get some prime minus deals at big banks, but they’re more like prime minus 10 or 15 basis points.
McLister said the rising cost of short-term funding, used for variable mortgages, explains the jump. Spreads are wide, fewer people want to lend big banks money at preferable pricing, so that gets passed through to the borrower, McLister said.
Fixed-rate mortgages, which are tied more to swings in the bond market, are also creeping up after Canadian bond yields hit record lows earlier in the month, added Cooper.
“The banks just can’t afford to price their loans at what are de minimis bond yield levels,” Cooper said.
She expects banks to start charging prime plus a premium for variable loans, as well as higher rates for fixed mortgages than those seen earlier in the year.
“I believe mortgage rates will trend around current levels,” Cooper said. “I don’t think interest rates in general are going to be a lot higher in the next year.”
Air Canada to reduce workforce by 16,500 as it parks planes during COVID-19 – Financial Post
Air Canada will send home 15,200 unionized employees and 1,300 managers due to the “unpredictable extent and duration” of the COVID-19 pandemic.
Canada’s largest airline announced Monday it will place the unionized members on off-duty status and furlough the managers as it reduces capacity by about 85 to 90 per cent from April through June. It intends for the cuts, which will come into effect on or about April 3, to be temporary.
“To furlough such a large proportion of our employees is an extremely painful decision but one we are required to take given our dramatically smaller operations for the next while,” Air Canada chief executive Calin Rovinescu said in a statement.
“I understand and regret the impact this will have upon our employees and their families.”
Rovinescu and chief financial officer Michael Rousseau will forgo 100 per cent of their salaries, while other senior executives will take a 25 to 50 per cent pay cut. Board members agreed to a 25 per cent pay cut. Other managers’ salaries will be reduced by 10 per cent.
On Monday, Prime Minister Justin Trudeau announced the government will subsidize 75 per cent of wages for companies that lose 30 per cent of their revenue during the shutdown. It’s not yet clear how Air Canada could benefit from this, but the airline said it will assess how the subsidy could affect its workforce reduction plans.
Trudeau also acknowledged the airline industry has been “extremely hard hit” by the pandemic and said the government will do more to help the industry, but did not reveal any details.
The prime minister and senior government officials have been working with Canada’s major passenger airlines as they seek help during the crisis. Ottawa has already agreed to provide Toronto-based Porter Airlines with $135 million in commercial financing, but has yet to reveal a comprehensive package for other airlines including Air Canada, WestJet Airlines Ltd., Transat A.T. and Sunwing.
To help deal with plummeting revenue, Air Canada is also looking to cut $500 million in costs and capital spending. It will draw down about $1 billion in operating lines of credit for additional liquidity and suspended its share buyback program on March 2.
Air Canada is working with Ottawa to repatriate Canadians abroad. It will continue to operate a select number of flights after April 1, pending further government restrictions, as well as operating cargo-only flights to ensure movement of goods, such as medical supplies.
Air Canada employed about 33,000 people at the end of 2019, according to financial statements.
Air Canada employs about 4,400 pilots. It’s not clear how many pilots will be affected by the decision, but last week the Air Canada Pilots Association reached a deal with the airline to reduce pilot pay, allow pilots to retire earlier and plan for a maximum of 600 redundancies in the coming months.
Pilots placed on furlough will continue to accrue seniority and service and will be recalled in order of seniority, the ACPA said in a statement.
The International Air Transport Association predicts airlines around the world will lose US$252 billion in revenue due to the COVID-19 pandemic.
Coronavirus: Air Canada to lay off 16,500 workers amid COVID-19 pandemic – Global News
Effective this Friday, the layoffs of 15,200 unionized workers and 1,300 managers will last through April and May amid drastically reduced flight capacity from the Montreal-based airline.
“To furlough such a large proportion of our employees is an extremely painful decision but one we are required to take given our dramatically smaller operations for the next while,” chief executive Calin Rovinescu said in a statement.
The carrier has halted most of its international and U.S. routes in response to the global shutdown.
States from Sweden to China to the United States have rolled out aid packages for the airline sector over the past month as borders closed and travel demand plummeted amid the spread of the novel coronavirus.
Air Canada said its cost reduction scheme aims to save least $500 million. It includes a pledge from both the CEO and chief financial officer Mike Rousseau to forego 100 per cent of their salaries, while the rest of the executive team will give up between 25 per cent and 50 per cent.
The company will draw down about $1 billion in lines of credit to provide additional liquidity for a carrier that has a $7.3 billion cash cushion to fall back on — more than the most profitable U.S. carrier, Delta Air Lines.
Leon’s Furniture to lay off nearly 50% of workforce
Earlier this month Air Canada’s flight attendant union said 5,149 cabin crew would be temporarily laid off due to the COVID-19 outbreak. The newly announced layoffs do not include the earlier job reductions.
The pandemic has cost thousands of jobs in the airline sector. Transat AT Inc. has laid off at least 3,600 flight attendants while WestJet has seen 6,900 departures including early retirements, resignations and both voluntary and involuntary leaves.
WestJet said Monday it is cancelling all transatlantic and U.S. routes until May 4, extending its 30-day suspension by two more weeks.
Both Air Transat and Porter Airlines have halted all flights.
© 2020 The Canadian Press
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