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On March 27, President Trump signed the CARES Act, the third COVID-related relief bill, into law which effectively puts much of the U.S. economy on the government’s payroll for a few months. The CARES Act follows the passage of Phase I relief (the Coronavirus Preparedness and Response Supplemental Appropriations Act), which provided $8.3 billion of support, largely for COVID-19 vaccine research and development, and Phase II (the Families First Coronavirus Response Act), which boosted aid by $192 billion for free COVID-19 testing, state unemployment insurance, expanded paid sick leave, and food assistance.

The CARES Act provides over $2 trillion in stimulus, directed majorly at small businesses and middle- and lower-income Americans. In addition, the CARES Act provides around $450 billion for the U.S. Treasury’s Exchange Stabilization Fund to use as loans, loan guarantees, and investments for the Federal Reserve to help distressed companies and industries. Levered up with funds from the Fed, the U.S. government is set to provide subsidized short-term credit, potentially amounting to around $4 trillion, to a wide range of business borrowers.

“The sums, while considerable, are unlikely to be nearly enough to offset income lost due to business stoppage,” noted Chief U.S. Economist Michael Feroli and Senior U.S. Economist Jesse Edgerton. “For this reason another stimulus bill seems inevitable.”

A staggering 16.8 million U.S. workers filed for unemployment benefits over the three weeks ending April 4, and the U.S. economics team projects the April jobs report could indicate about 25 million jobs lost since the March survey week. The U.S. economists also estimate that the CARES Act points to around 3% of GDP stimulus this year with the patchwork of policy supports in the package focusing heavily on income support for rising unemployment, which could spike to 20% in April.

As harrowing as these numbers are, with the added federal funds coming shortly, the unemployment checks will provide an important cushion for consumer spending, but the cost is that the fiscal deficit will reach a new peacetime high of 12% of GDP.

With the imposition of stay-at-home orders for a majority of states, the virus is now impacting activity in essentially all sectors of the economy. The U.S. fiscal deficit will be greater than $2 trillion and 10% of GDP in both fiscal years 2020 and 2021. The federal rescue will result in a record $2.4 trillion of net Treasury supply in 2020.

“As harrowing as these numbers are, with the added federal funds coming shortly, the unemployment checks will provide an important cushion for consumer spending,” added Edgerton. “But the cost is that the fiscal deficit will reach a new peacetime high of 12% of GDP.”

Meanwhile, businesses have borrowed at low interest rates over the last 10 years, leaving the ratio of business debt-to-GDP at all-time highs.

Record U.S. debt levels alongside record fiscal deficits

Source: Federal Reserve, J.P. Morgan. Grey bars indicate recession

Line chart showing the record U.S. debt levels alongside record fiscal deficits.
Federal government deficit projections, $ billions
FY2020 FY2021
Pre-COVID-19 CBO Forecast 1,073 1,002
+ Revenue Effects of downturn 250 400
+ Automatic spending effects 150 200
+ Fiscal stimulus 900 400
Total 2,373 2,002
JPM deficit forecast 2,400 2,000
As % of GDP 12% 10%

Source: CBO, J.P. Morgan


What are the key components of the CARES Act?

While the public health response has been disjointed, the fiscal response has been more vigorous. The $2.3 trillion stimulus bill passed by Congress includes:

  • A $350 billion Paycheck Protection Program (PPP) for small businesses delivered by the Small Business Administration through private lenders in the form of loans to pay workers, rent, and utilities for eight weeks that will be forgiven if headcount at the end of June is similar to what it was in February without large reductions to pay. (At least 75 percent of the forgiven amount must have been used for payroll.)
  • All lower and middle-income Americans will receive a $1,200 check for individuals, and $500 for each child, which will quickly get about $290 billion into the hands of American consumers.
  • The duration of unemployment benefits is extended an additional 13 weeks, as often happens in downturns, and normal benefits are topped up with an additional $600 per week. There is also a new program for the self-employed and contractors who wouldn’t otherwise qualify for normal benefits.
  • $150 billion for state and local governments, which will surely see their finances deteriorate in coming months.
  • $117 billion for hospitals and veterans’ health care, including for measures directly related to COVID-19.
  • Direct federal spending was increased in a number of areas, including $25 billion for food stamps, $24 billion for USDA, and $10 billion for the post office.
  • The Treasury received $500 billion for aid to industry, nonprofits, states, and cities. Some of this will be directed toward industries that have been particularly hard hit, notably the airlines. But the majority of it will be used to partner with the Fed.

Key funding provisions in the CARES Act

Business-focused provisions Estimated cost (billions)
Loans and guarantees for large businesses and gov'ts $510
Small business loans and grants $377
Business tax breaks $280
Support to transportation and transit providers $72
Household and other provisions Estimated cost (billions)
Direct payments of $1200/adult and $500/child $290
Unemployment benefit boost of $600/week and extension $260
Hospital, Medicare, and other health-related funding $180
Aid to state and local governments $150
FEMA disaster assistance funds $45
Increased food stamp, nutrition, and housing funds $42
Education Stabilization Fund and related programs $32
Other spending $25
Individual tax breaks $20
Total $2,283

Source:, J.P. Morgan

Fed intervention has improved market function in Treasuries, agency MBS and money markets. In addition, there are some signs of stability in High Grade credit. During the month of March, U.S. high grade bond issuance hit a record $262 billion and secondary bond trading volume was also a monthly record at $29.4 billion per day. However, the recovery has been uneven with lower-rated Emerging Markets and High Yield lagging.

The U.S. hospital industry generates ~$100 billion of revenues per month and the CARES Act includes a 20% Medicare inpatient prospective payment system (IPPS) reimbursement bump for COVID-19 patients, 2% overall Medicare sequestration relief for eight months, Medicaid Federal Medical Assistance Percentages (FMAP) increases amended from Phase II that may or may not translate into rate improvements and a $100 billion “provider” relief fund to reimburse for expenses and lost revenues. If hospital revenues were to decline by 50%, the fund could be consumed by claims for lost revenue alone within two months (excluding any costs related to a building surge in capacity of beds and supplies). Further, the relief fund is not limited to hospitals; it appears doctors, clinics, ambulatory surgery centers (ASCs), nursing homes, labs and more would all be eligible.

“The stimulus bill is not enough as hospital revenues are declining much faster than expected; we expect deferred procedures to exceed actual virus treatment costs, hurting hospitals but benefiting managed care,” said Gary Taylor, Hospital and Managed Healthcare analyst, adding that “the Medtech space will be most adversely impacted as elective and postponable procedures are likely to take a sizeable hit, and the crisis will materially accelerate the shift to value-based-care arrangements for physicians.”

While corporate debt spreads are at post-crisis highs, and corporates have drawn on bank revolvers up to $333 billion as of April 14, U.S. Global Systemically Important Banks (GSIBs) issued $41 billion during the month of March, and we believe GSIBs could add $15-20 billion if markets remain stable to build buffers.

“Large cap banks are much better positioned this time, with much higher capital and liquidity as well as lower risk, with subprime and leveraged loans down,” noted U.S. Large-Cap Banks analyst Vivek Juneja.

However, U.S. small- and mid-cap banks are unlikely to take advantage of the option to delay Current Expected Credit Loss (CECL) implementation. “Even though we were initially very optimistic that the delay of CECL could be a huge benefit to bank stocks, as well as the economy, we now actually see very low odds that the banks take this option to delay,” said Steven Alexopoulos, U.S. Small- and Mid-Cap Bank analyst, adding, “Moreover, similar to the TARP (Troubled Asset Relief Program) approvals in the 2008/2009 timeframe, we see a very similar situation in which banks will not want to stand out from the pack when it comes to taking the option to delay the implementation of CECL.”

Mortgage refinancing (refi) demand remains robust as existing borrowers are still reacting to lower rates. However, cancelled house viewings and economic uncertainty are weighing on purchase demand. Overall purchase application demand has declined 20-25 percent year-over-year, and the downturn has been particularly sharp in states with early COVID-19 lockdowns.

The CARES Act requires forbearance on government-backed loans to last at least six months and up to a year. Due to job losses or furloughs, a sizeable chunk of the borrower population will soon be missing payments, likely preventing them from refinancing their mortgages, at least temporarily. In addition, refinancing activity could also be disrupted by lingering effects on the originator community.

“Looking ahead, we assume a 30% disruption to refi closings in the near term and a much weaker purchase market,” said Matthew Jozoff, Co-Head of Fixed Income Research. “Over the medium term, income disruptions are likely to leave a dent in home purchases, while home price depreciation and tighter underwriting standards will likely suppress cash-out refinancing activity.”

The spread of COVID-19 across the U.S. has temporarily shuttered auto production and similarly impacted a large portion of the U.S. economy, which has significantly lowered the outlook for vehicle sales in 2020. Asset roll-off should exceed debt maturities in 2020, while captive finance assets, comprised mainly of auto loans and leases and dealer floorplan financing, are short-term in nature. During the Global Financial Crisis, the Federal Reserve’s TALF (Term Asset-Backed Securities Loan Facility) program, announced November 2008, was effective in re-opening the asset-backed lending market for borrowers. The TALF program provides loans to borrowers against eligible asset-backed securities (ABS) collateral. It is designed to reinvigorate investor appetite for this important source of consumer credit and will make $100 billion of such loans available. At a time when unsecured funding costs have become uneconomical, we think the renewal of this Fed program will enable efficient funding for Ford Credit and GM Financial in the ABS market.

“TALF 2.0 is a welcome development from an ABS funding perspective,” commented Avi Steiner, High Yield Broadcasting & Publishing and Automotive analyst and Jonathan Rau, High Grade Autos & Auto Parts and Basic Industries analyst. “We expect these companies to rely heavily on the ABS market for future funding needs.”

A key difference between 2008 and 2020 is both the trajectory and absolute level of gasoline prices. The current direction and absolute level of gas prices should, all else equal, be supportive of a consumer preference for trucks and SUVs.

Despite these extraordinary actions, J.P. Morgan’s US economists expect real GDP to decline by 40.0% annualized in 2Q. Although they continue to look for growth to rebound in 2H, at an 18.0% average pace, they forecast full-year (Q4/Q4) growth at -6.9%.

“A fourth fiscal stimulus bill for as much as an additional $1 trillion is already being discussed, focused on providing greater support for local and state governments, and funding improvements in health and digital infrastructure,” said Joyce Chang, Chair of Global Research.

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