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'Tis Not Merry Twistmas
Courtesy of Lee Adler of the Wall Street Examiner
'Tis Not Merry Twistmas
The Fed's security holdings rose in the week ended 10/12/11 by just $0.6 billion, net (versus $22-25 billion per week during QE2). None of the Fed's GSE holdings matured. There was no net change in MBS holdings. The Fed's $10 billion of MBS purchases in the past 2 weeks won't start settling until November.
The Fed continued Operation Twist, with purchases of longer dated securities offset by sales of short dated securities. These operations are a wash for the PDs and for the system as a whole, so there's no need to go into detail on the amounts, which in round numbers have totaled roughly $9 billion in purchases and $9 billion in sales per week. You can find the particulars of the daily operations at this link. http://www.ny.frb.org/markets/pomo/display/index.cfm?showmore=1&opertype=orig.
Since the day after the Fed announced the program the 10 year yield has risen roughly 40 basis points. So much for pushing down yields at the long end. Of course, the announcement was well telegraphed for a month in advance, so there was massive front running with yields heading down. Once announced, bond traders sold the news, and have kept selling.
The market has begun to choke on the additional Treasury supply dumped on it by the FCBs. This is a major sea change as the FCBs, instead of absorbing massive amounts of new Treasury supply are now adding to that supply by disgorging the paper they are holding. On top of that, except in weeks where the Primary Dealers must absorb newly issued supply, there have been signs that they are dumping Treasuries across the entire spectrum. That was not supposed to happen, but we had seen in the Primary Dealer data for months that the dealers were positioned wrongly when the big rally in bonds began. Goldman Sachs's just released earnings have confirmed these indications.
Flashback (10/2/11): The Fed has posted FAQs on the MBS replacement purchase program here: http://www.ny.frb.org/markets/ambs/ambs_faq.html It will post a new schedule of purchases on October 8. It also states that, "For the period from October 3 to October 13, the Desk plans to purchase approximately $10 billion in agency MBS." Those purchases will be directly from Primary Dealers.
The Fed has scheduled MBS purchases of $22 billion in the period of October 14-November 10. This is in recognition of the increased rate of MBS paydowns from its balance sheet due to increased refi activity in the wake of the sharp drop in bond yields in August and September. Prior to that, the MBS paydowns were occurring at the rate of about $10 billion per month. As rates rise, they should recede to that level again, and the Fed's purchases from the PDs will follow.
The Fed reported that it bought $5.2 billion of MBS from the Primary Dealers on October 6-12. However, these purchases and $4 billion purchased the week before will not settle until November and December and will not show up on the balance sheet until then. Likewise, the cash won't hit Primary Dealer accounts until then. The exact settlement dates are not published.
This means that October will be a severe dry spell for the dealers, since they won't be getting new cash from the Fed until November. It may partly explain why they were selling so heavily in September. This is unlike the Treasury purchases under the previous MBS replacement program. The Treasuries settled the next day.
With yields having reversed, mortgage rates have begun to rise again. This will shut off the flow of refis that had spurred the recent increase in MBS paydowns from the Fed's balance sheet. Given a lag of about 60 days from refi application to funding, MBS paydowns will begin to recede and the Fed's replacement purchases will begin to be reduced in December, cutting the cash to PDs to negligible amounts each week. By the same token, even the $22 billion scheduled for this month is insufficient to fund new Treasury supply, especially with foreign central banks now adding to supply, rather than absorbing much of it as they had for the past decade.
Recent History (7/26/11) That is grossly insufficient for helping the Primary Dealers absorb all of the new supply. They and the markets have been saved by the "miracle European panic" that has sent cash cascading from Europe into the US financial markets and banking system. As long as this continues the Fed won't need to consider QE3. At some point, that panic flood will subside; either because it is exhausted or the news in the US will have become so bad that capital will begin to flow out rather than in. We'll keep an eye on our financial indicators for any sign of that.
(9/9/11) I have expected MBS paydowns to increase sharply in response to a wave of refinances triggered by record low mortgage rates causing another refi wave. My take was that the Fed's Treasury purchases would fall short of covering for that and its balance sheet would shrink a little. So far, paydowns have increased only slightly. Refi applications surged in early August. Funding of the new loans should result in paydowns increasing later this month or early in October. However, the refi boomlet has been sputtering. It's not clear that it will have a major impact on the Fed's balance sheet.
MBS paydowns should continue to expand as the recent surge in refinances driven by the crash in mortgage rates gets processed through to settlement over the next couple of months. When rates rise, the surge will recede. The Fed should increase its purchases to offset the MBS leaving its balance sheet, but again, the impact should not be material relative to the level of net new Treasury supply which should be between $100 billion and $150 billion per month.
The Fed estimates the MBS paydowns in advance and schedules POMO to replace them on the balance sheet. The POMO are Treasury purchases from Primary Dealers, even though they were not the holders of the MBS. But the amounts are immaterial in relation to the new Treasury paper the dealers must absorb each month.
In conclusion, the money flow data suggests the Primary Dealers will not have enough extra liquidity to throw a big Twistmas party in the stock market this year, unless that money is funneled out of Treasuries. If stocks rally, Treasuries will suffer. There’s enough scared money still flowing from Europe into US system to support a rally in one market or the other (stocks or bonds) but not both - short of a visit from St. Nicholas.
If the capital flow out of Europe into the US ebbs even a little, it’s game over for both bonds and stocks.
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Somebody mention Christmas .....http://i.imgur.com/zI5B5.jpg
well real jews anyway. today, even joos shop mindlessly just like christians for this Hallmark holiday.
But one thing for sure, Joos will make you work on Christmas day
Here's the deal... the Fed will soon have a tragic accounting error (the typo to end all typos) and ALL of those billions will suddenly disappear.
poof...gone... scampered into oblivion w/out a trace!!
answer solved... money supply reduced... threat of inflation is deflated... debt is vanished with no haircuts.
Old Ben, his momma didn't raise no idiot!!!!
bee you tee ful!!!
There is always a "scalp" fee, guess who gets the "management fee". guess who will "take payment" at the appropriate market timing. Everytime transfers happen, someone can be in the middle... a little here, a litle ther. When vast amounts transfered, the scalp consists of a full body shave.
...just quit reporting the 'number' and it will also just go away.
they don't call it mutually assured destruction by accident.
The fed is a bunch of dumbfucks. Ben telegraphs twist, 30 years go up over 20% two months prior. Ben loves paying top dollar. Buy high sell low.
MBS To bank crap collateral; he'll never get much principal back.
They are like some stupid used car dealer who keeps making bad deals just to make a deal then pooof he's out of business.
End the fed
move your money to north dakota state bank and give silver coins this christmas. It is a gift that keeps on giving.
Dear Bennie
Repeat after me: Stocks must outperform bonds YOY, or I won't be reelected. Should that happen you and your friends will have some company come November. Think in particular one squinty eyed little Texas Congressmen and his Tea Party pals. Do you want to be remembered as the Last Fed Chief? The guy who unleashed monetary chaos? The head of a Central Bank that was given absolute monetary control of the world's greatest economy, only to become known as the guy who couldn't run a decent check kiting scheme! It's not like there are hoardes of Vandals wading across the Rio Grande! Those people want to grow the economy for Christ sake, and I have to keep them out, because it screws with your program of asset levitation??
Come on, Bob Novak, R.I.P, once told my predecessor to stop saving the stock market for the benefit of "Liberal" stock pickers, (and really Cramers audience is pretty bipartisan isn't it?) and try to improve the business climate. Well OF COURSE HE DIDN'T LISTEN, who cares about business, the point is, we need those stock pickers, we need Cramerica, we need corporate profits, through financial engineering. I need to get reelected, you need to enter the Fed Chief Hall of Fame, and I will build that personally, and cut the ribbon.
But first things first. Paint that tape...
Sincerely BHO
that seems far too sophisticated for barack ("profit/earnings ratio") obama. imo if he understood finance and economics better, he might have made fewer mistakes, even bought and paid for as he is. we'll see.
That jives with my theory.
It is simply supply and demand. The Treasury needs to find $120B in new buyers every MONTH (Federal deficit = $1.5T annually now).
As the Fed stops neutralizing this supply and demand and the pricing changes finally become really ugly. Massive increases in supply without the equal increase in demand means the price goes down.
Higher interest rates in 3...2...
Except that every risk-off investor in the world has to buy more and more large-country government debt in order to move their portfoliios down the risk ladder.
The world economy settles its debts in G-20 currencies. Show me a way to hold G-20 currencies more safely with more liquidity than government bonds and I'll say you have an argument.
Remember, everyone predicted Japan's interest rates would go up. Didn't happen then and it still hasn't happened.
Somebobody is thinking.
The following is nonsense:
This is the same "evidence" ideology-driven bond-haters have ridden to huge losses since '08. There is NO evidence that the market is anything but hungry for U.S. debt.
What else are risk-off investors supposed to buy? Gold? With that volatility? Besides, it's just too small a market.
Actually, there is plenty of evidence as put forth by Bill Gross and many others that the majority of new issuance is being absorbed by the Fed or by the primary dealers with free money from the Fed. Whether or not speculators win or lose on their bets as to the direction of rates is irrelevant. The fact is that the Fed is of stated policy to hold rates low and the only way to do this is through direct intervention.
Japan's rates did not go up because the populace was directed to absorb the issuance. 90+% of the Japanese debt is held domestically. Completely different game to treasuries.
and japan was able to devalue its currency versus the world reserve paper currency, the USD. To keep rates down the USD will need to devalue versus.....hmmmm.....gold?
I'm still listening....a little
What else are risk-off investors supposed to buy? Gold? With that volatility? Besides, it's just too small a market.
Gold's ability to absorb fiat is infinite. It gets even more efficient as the "price" goes up.
Chief say "Screw it! Time to buy lake home and fish for food."
www.blackpineslakehome.com
I am The Chief
Lake Blackie sucks - took my son to a junior golf tournament there - Move away from Lake Blackshear
Junior must have stunk up the course.
And he obviously got his winning personality from you.
I am The Chief!
And live in perfect harmony w all of your best friends....