Warsh Fed Ditches Interventions, Leaving Investors on Edge

The Federal Reserve's capacity to intervene in corporate credit markets is being scrutinized by experts. According to David Tam from BNY, while the Fed has legal authority and institutional capacity to support corporate credit, the current Warsh-led Fed is unlikely to repeat Covid-era interventions.

The PMCCF and SMCCF programs set up during the early days of Covid saw limited take-up, with only $14bn in transactions through the SMCCF. Critics argue that these programs increased moral hazard. Tam notes that the bar for intervention under the Warsh Fed is 'extremely high'.

Tam sees no immediate cause for alarm, citing narrow Bid-Ask spreads and solid demand. However, he warns that investors should be aware of potential issues in a selloff scenario, where dealers or the Fed might not be able to contain a widening in credit spreads as quickly as they have in the past.

Tam advises keeping an eye on dealer net positioning and total fails, as well as long-end yields. He believes that a decline in long-end yields could make the value proposition less compelling.