New Flow Of Funds Report Demonstrates Massive Selling In Agency & MBS Holdings Away From The Fed
Today the Fed released its Q4 Flow of Funds, aka Z.1, report. Using the data in this report, some have focused on such temperamental measures as household net worth, which in Q4 came out at $54.2 trillion, a $700 billion increase from Q3. What they will not disclose is that all of this increase came courtesy of the stock market, as the "Equity Shares at Market Value" line increased from $15.546 trillion to $16.234 trillion: this represented the entire increase in household net worth. Should the market dive, as many are concerned it is will once the Fed stops manipulating the mortgage (and potentially equity) market, watch all this intangible net worth disappear, as unbooked profits are just that - unbooked. Others will tell you that consumer deleveraging continues unabated, which is true: the decline in total non-financial debt in Q4 for Households and Businesses was -1.2% and -3.2%, respectively. Who made up the difference: the US government of course, whose domestic nonfinancial debt holdings increased by 12.6%. We, instead focus on Tables F.209 and F.210, the detailed listing of holders of US Treasuries and Agencies/MBS securities, as this is precisely where the Fed is the dominant market maker, and the means by which Ben Bernanke continues to manipulate the market by being the perpetual bid for 5% and lower yielding securities, thereby forcing all other yield chasers to go lower in the cap structure and buy, buy, buy all equities. And while there are no major surprises in the data set, it is notable that even as the Fed has purchased over $1.5 trillion in Agency/MBS debt, the total amount of all such securities over the past year has remained constant. The Fed has been buying everything that other have been selling. Adjust the data to exclude the Fed's purchases and one sees just how scary the MBS situation truly is.
First, we present the dramatic increase in UST holdings broken down by end-purchaser. Yes, this includes the infamous Household Sector. According to the Z.1, there was roughly $7.8 trillion in total holdings of US debt (which is in line with the most recent number of total marketable debt of just over $8 trillion), of which the Rest Of The World category (i.e. China, Japan, UK), are the biggest holders, accounting for 47% of total US debt. If the total were adjusted to exclude holding by the Federal Reserve, foreigners would be the owners of a majority, or 53% of the total US debt currently.
As the chart above shows, at Q4 there were $7.8 trillion, a $260 billion increase sequentially. This was not due to the Fed, which did the bulk of its terminated UST QE portion in Q3. The biggest sequential change came from foreigners, which bought $115 billion (since this is likely based on TIC data we would be vary cautious with that number), and from the "Household" sector, which as we now know is merely a plug for everything else. Recall that households were net buyers of $151 billion in the prior quarter. The third largest purchaser were mutual funds with $38 billion bought in the quarter. The only seller of UST bonds in the quarter were money market mutual funds, which offloaded $20 billion in USTs.
Next, we look at MBS/Agency holdings. These are more interesting as the total holdings over the past year has not only not climbed, but has in fact declined by $70 billion from the peak in Q4, 2009, which was at $8.17 trillion. In Q4 the number came at $8.1 trillion.
When looking at the Sequential change in holding by selected key accounts, we see a very interesting picture emerge: the only buyers of GSEs and Agencies over the past 4 quarters have been the Federal Reserve and the US Government. In Q4 another purchaser emerged: commercial banks, which saw their GSE holding increase from $1,185 billion to $1.277 billion.
When we adjust to exclude the contribution of the Fed, a vastly different picture in MBS holdings emerges: we see a hole of over $1.2 trillion since the peak holdings of $8.1 trillion in Q4 2008. This is an amount last seen in Q2 2007, when interest rates across the board were about 4-5% higher, and when Cramer went nuts on TV saying the Fed "knows nothing" and need to loosen monetary policy immediately. Sure enough, it did, and now we are stuck with ZIRP in perpetuity. What it means is that in a steady state market, in which there is no massive Fed intervention, the rate on 30 year Mortgages would likely be at around 6-7% on the 30 year, if not more.
Looking at the sequential change in holdings, when adjusting to exclude Fed holdings, shows the sorry picture in demand for MBS.
A reminder: the Fed's MBS purchasing program ends in 3 weeks. All the market optimists will have you believe that this is priced into the market, and the a massive short covering spree will drive MBS and what not higher. We disagree.