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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.
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Correct me if I'm wrong, but as of this moment, the Fed is going to stop purchasing MBS's by the end of this month?
There is no QE 2.0 out there is there?
Benny will not stop the purchases.
I'd bet on it if I were in the market -- which I'm not. Vegas is more fun and economical. There you know your stats
The fed will pump the market and print money to infinity.
They wont let them fall. Period. Cuz if they will, there will be anarchy and nothing will be left anyway.
So as of today, I think all of us fucking bunch of shorting idiots should accept the fact that Fed will do whatever it takes to prop up the markets. And let's stop this "impending doom" talk. It's pathetic by now, 1 year on...
Go Fed! Save us all!
Like alchemy in the middle ages, what the Fed is doing can't possibly work. Might as well click your heels together three times.
Abolish the Fed. Corrupt, theiving, assclowns.
I think it's dangerous to conclude that the Fed will just keep printing away-- because I think the Fed even realizes that this alchemy can't possibly work.
While many were skeptical, the Fed actually pulled back on the ememgency loan programs, and are effectively retiring them. I know firsthand that the Fed has alerted its member banks to have their balance sheets tidy in case there are sudden upward movements in interest rates.
The late capital raising by the likes of Citigroup is not a mistake. Investors need to be open to the possibility that the Fed may well come to a total halt on MBS and Treasury purchases-- and allow their institutions to absorb a great deal of pain. It's entirely possible that the Fed gave its member banks a year to get what act they had together in top form... before they exited as a propeteer.
Again, were are entering the Zero Hour. I think it would be wise for investors to hedge against both outcomes.
NAR has a Government Affairs Division that is working very hard to see that the Fed's MBS purchasing program does not end in 3 weeks... something about dire consequences
of course it will not end. even if it will end then they will do it under cover. it's a fact. markets will not fall because the ensuing chaos will destroy everything. it's a one way street.
First off, this is not the equity market, they can't buy 70% of the market under cover.
It will be interesting to see if they jump back in, and when.
Your theory falls on the face when you accept that chaos cannot be prevented, regardless of where the markets go.
you are right, chaos will strike at some point, thats a mathematical certainty. I am just saying it won't strike in the near future. Cuz like they say, in the long run we're all dead anyway. I am not concerned with the long run.
So they have a printing press, the power and the will to prop up the markets. after all, they woudn't want anything bad to happen since throughout history one particular group of people was always found guilty for whatever bad things happened...so rulers of this world want peace and quiet, which in the end is good for all of us.
at least that's my theory.
you are right on the money Zexe
not sure how many more times i need to type this out, but in a managed currency system the gov't runs the casino and issues the chips. dollars are not money (a store of value), they are a TEMPORARY transfer medium. worrying about if they lose value, what they are, blah, blah, blah is all BS.
what things are worth is just a paper entry of what the last guy paid. so the game is to keep chips exchanging no matter what, no matter the price. got to keep those illiquidity driven panic markdowns from happening. so, no chips=fall of 2008. too many chips =late 70's, pissed off people but no panic.
when people hoard the chips, the fed makes more to punish them. when people stop hoarding then they get punished too through inflation. SO GET BACK IN LINE AND DO WHAT THEY TELL YOU
all the while, there is a political bogeyman and the powerful maintain control.
if dollars were real money then common sense would prevail and free market principles would apply. that's not what we have here.
No. Imagine a 9.0 quake hit downtown LA over the weekend. If it happened in Chile it can certainly happen in California, where they already get hundreds of smaller quakes a day.
That's what Taleb means by a "black swan."
I'm just sayin' ... never say never.
"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."
You guys are missing a HUGE part of the equation. The Fed bought up the supply that was created by securitizing EXISTING loans on FNM/FRE's books. This is where the huge supply came from.
There is no massive supply to be met going forward -- unless there are massive re-fi's and/or huge amounts of loans that are going to be made that I don't know about... Unless we're going to start selling houses like it's 2005 again...
The Fed effectively met the supply that dumping FNM/FRE's balance sheets created. that is over. end of story. yields DOWN from here.
???
They are buying new issuance. A very small part of that came from whole loans on Fannie's balance sheet that were securitized.
off the cuff, about 1/2 of the FNM/FRE 'issuance' last year was from whole loan securitization. GNMA was about 1/2 of the total issued last year, and they are now more-or-less insolvent; and the 3.5% down 1st time buyer tax credit demand is about cooked. housing on the down turn again.
G'face, where is your issuance supply for 2010 and beyond coming from? where is this robust housing market?
to bring in a 3rd party, MBA projects ~$100bil in new supply for 2010 -- about the lowest in the last 20yrs.... that's early 1990s type supply -- essentially nothing.
Are you talking 100B a month? Cause below is the link to the latest MBA estimate.
Page 5, mortgage originations ,1.3T for 2010. 100B a month, not all year.
To compare, Q2 09 - Q1 10 will be about $2T, not all of which was securitized, and Bernanke will have bought $1.25T, so let's say maybe 300B in the past year was securitized and not bought by Bernanke.
Say $1B in 2010 will be originated and securitized. Where is the additional $700B coming from?
http://www.mbaa.org/files/News/InternalResource/71552_EconomicForecast.pdf
I'll have to digest your data a little further, does not seem to jibe exactly -- my data was from a written report quoting MBA forecasts... though what I am talking about is a little different: 'new' paper available to public... net of 1Q 2010 Fed purchases, net of principal paydowns, net of refi... further, your data is origination, right? not securitization? Perhaps our numbers do add up.
But... isn't that ILLEGAL?
The problem is that the Fed won't be there to buy the current coupon, which is how it has managed to keep rates artificially low. Here's a slightly off-topic but informative post:
http://accruedint.blogspot.com/2009/09/mortgage-bonds-its-trap.html
So, if I understand you, SwedeMan, FNM/FRE merely offloaded all of their "old" loans. What happened to the more recently originated loans? I thought to be effective, the Fed had to acquire the current issuances so as to keep current rates down. Buying up the old stuff at the old rates (presumably about the same) would not have had the desired effect on current rates, correct? Old news, in effect, perhaps clearing the inventory for new acquisitions but not necessarily setting the market for the current rates.
there was current issuance as well -- just that what was 'over' supply, so to speak - what would have kicked up interest rates, was largely existing loans. that's, in large part, the supply that was met to keep rates low.
further, pensions, mutual funds and foreign were net sellers in most of 2008 and all of 2009, and we all know fund flow data shows money going to fixed...
my point is that we'll have a more than manageable supply, and we should see demand pick up from the otherwise 'usual suspects' to more than replace the exit of the Fed. (and no, the Fed will not be selling these back into the market at any time... this is an integral part of the Fed/Treas GSE bailout and will not see the street again)
just my thoughts -- thanks for the discussion
"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."
Scary only if you are buying and holding equities at these levels.
Myself I am giddy with anticipation of going short on, oh, April 1.
Thanks for the graphs, Tyler(s).
I'm off to google "Exchange Stabilization Fund".
hm. looks pretty shady to me.
http://en.wikipedia.org/wiki/Exchange_Stabilization_Fund
Interesting chart illustrating the evolution of the Federal Reserve's Agency MBS Purchase Program.
http://www.mortgagenewsdaily.com/cfs-file.ashx/__key/CommunityServer.Com...
Try again. The market didn't hear you. Up over 40. Nice try though.
You tell 'em, Timmy
"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"
I have been surprised for the last year that no one highlights this point, which is a $1.25T proof, in case you needed another one, that the US authorities have absolutely no interest in helping anyone but themselves. The buying of MBS has nothing to do with having low interest rates to benefit the people (which would be an idiotic policy anyway but at least addressed at normal people). The buying of MBS has to do only with paying 100 and even more cents on the dollar to the holders of MBS.
I would also like to better understand the sausage-making process whereby the GSEs take the fresh mortgages they purchase from the originators and bundle them up into securitized mortgages.
Saw a very interesting presentation from Moodys.economy.com recently that showed the housing market back to trend (1.2MM housing starts) by 2012 and smooth sailing thereafter, except for the sand states (a WTF?!?!? moment for your correspondent). But a huge, unanswered question was: where is all of this consumer-end mortgage financing coming from? As a simple proposition, all loans right now are FNMA/Freddie, or FHA. If they cannot sell the agency MBSs, where does the money come from? Agency MBSs are the last remnants of the once mighty now completely moribund securitized mortgage debt market, needing not only this Christmas Eve quasi-governmental unlimited guaranty, but Fed purchases to boot, to keep it moving. All I see here is the MBS market simply halting by the end of this month, owing to an utter lack of interested buyers.
"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."
But what - what - is the point in pretending, every. single. day. that anything about the economy is normal. You know, by now, I'm pretty sure everyone on the planet has got a fair idea that something somewhere has gone wrong somehow. I mean who -for the love of a dry cardboard box - are the plunge protection team pretending for.. does anyone have a clue who -apart from the rebaters (is that still going on..)?
What, for example, is the basic form of the solution? Why are these people seen running around, spending trillions, then claiming to have saved the economy - when the next day they're -not even very intelligently- back to propping up, of all things, the stock market. It just beggars belief..
Do they not see that there is no way, not in this life not the next, that anyone is going to take the word of banker - how can you - look at the US media... look at the rebate program... there is no way that anyone is going to trust a bank. Is that where we are? You know who you are.. the only reason any of this continues to happen -is not because the rest of us are sheep- it's because you bought the courts and you bought the government abd that bought you the police
rrgh.
Does it really maatter who's been buying or who will buy GSE MBS's at this point given that the U.S. gov. has backstoppeds the GSE's. This is just a shell game moving money from the UST to the Fed back to the UST in the name of indirectly funnelling more cash to the banks to prop them up. Agency spreads are fallling to new lows and are likely to stay there after 3/31 since an agency has effectively become a UST with the backstop in place. Why should there be any spread over a UST at this point?
Agency spreads are at new lows because the Fed, in their own version of Brewster's Millions, are spending the rest of their money before their self-imposed 3/31 deadline.
Huge vacuum when they step away.
What I am saying is that everyone seems to think there will be this vacum after 3/31, but it doesn't really matter what the GSE's borrowing cost. They have unlimited UST backing to buy mortgages at what ever price they want. In addition, why would anyone be hesitant to buy a GSE MBS when it has become effectively a UST at this point under the conservatorship.
The shell game continues. Robbing peter to pay paul.
Robbing the Future to pay for the Past.
this trend means that yields should fall.
All those expecting a market crash, take a look at coal and pipeline MLPs...yields in the 6s or 7s.
I think that the market's rise has been more of a *reflection* of the fact that risk-free yields are 0 and anyone interested in any kind of a yield has to chase equity issues up.
I don't see a MLP like KMP going TU in even an apocalypse; they get paid to move gas around and pay a dividend on that traffic. If treasuries are risk-free yielding negative, that leaves stuff like KMP up there at 6.x% as about the best you can do looking for a low-risk yield play. If yields continue to fall, paradoxically, equity issues that trade more like bonds will continue to climb in price.
I mean, how else does one explain IYR these days? That's like a junk bond that suddenly got a gov backstop.
Remember when "investing" in Casino Equity Markets, the odds are against you and with the "House".
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