For corporates, the Federal Reserve’s plan to juice up the recovery by buying billions in US Treasuries is both good and bad.
The Fed is about to embark on its next round of stimulus by purchasing $600bn in treasuries from now until the end of June 2011. The point of the exercise, known as quantitative easing or in this case, QE2, is to quicken the pace of the economic recovery and ultimately get companies hiring again. It will obviously also keep interest rates low.
The plan has so far met with mixed results. Some in the market had been calling for more than $600bn. Others are questioning why it’s being done at all. And over the weekend German Finance Minister Wolfgang Schäuble criticized the Fed’s move, claiming it undermined the credibility of US financial policy and generally wouldn’t help its global partners, either. He also said it was the equivalent of China keeping the yuan artificially low (which also continues the fears of countries getting into a currency devaluation war). Whatever it means in the grand scheme of macro-economic things remains to be seen.
But for treasury it means several things. On the one hand if the plan works, it will continue the low-rate environment in which many companies have been able to borrow money on the cheap to buy back shares, acquire or pay dividends. On the other, it doesn’t leave treasury (or any other investors) with many options to increase returns on the company’s portfolio.
As we mentioned in an item last week (see story here), this frustration was recently expressed at a NeuGroup Treasury Investment Managers’ Peer Group meeting. Investment managers are stumped on where to put the company’s cash and at the same time, were getting some pressure from management to increase ROI. In a pre-meeting survey of TIMPG members, 50 percent of respondents said that in response to management pressure they would seek riskier assets like high-yield and emerging-market debt as well as leveraged loans.
QEII will also mean durations will likely be extended. In the TIMPG pre-meeting survey, actually taken well before the Fed’s announcement, 54 percent of respondents said they would extend duration. This makes sense as the Fed’s buying will mostly be in the short end, from 2 to 10 years, which will keep a lid on those rates for possibly years to come.
It will take time to see whether the Fed’s scenario of speeding up the recovery and containing inflation plays out in the way it wants. In the meantime, treasurers will have to put on their Fed-watcher caps and monitor central bank trends.