Via Wolf Street

SPVs to nowhere.

By Wolf Richter for WOLF STREET.

Total assets on the Fed’s balance sheet for the week ended September 9, released this afternoon, fell by $7 billion from the prior week, to $7.01 trillion. Since the peak on June 10, total assets have declined by $158 billion:

The Fed has numerous asset accounts on its balance sheet that are unrelated to QE. Some of them fluctuate from week to week. Others, such as its holdings of gold or SDRs (IMF’s Special Drawing Rights) do not fluctuate. But to see where the Fed is going with QE, we look at the five major QE-related categories on the Fed’s balance sheet: Repurchase Agreements (repos), Special Purpose Vehicles (SPVs), central bank liquidity swaps, mortgage-backed securities (MBS), and Treasury securities. In total, balances of the five categories combined fell by $11 billion on today’s balance sheet compared to last week:

  • Repos: unchanged (at $0)
  • SPVs: -$2 billion
  • Central Bank Liquidity Swaps: -$17 billion
  • MBS: unchanged
  • Treasury securities: + $7 billion

Repos: at $0 for the 10th week:

Central-bank dollar liquidity-swaps: -$17 billion.

The Fed provided dollars to a few other central banks with these swap lines, but they are falling out of use and balances declined by $17 billion during the week, to $72 billion, from a peak of $449 billion in May. The Bank of Japan accounts for 79% ($56 billion) of the remaining total. Swaps with the ECB fell to $6.5 billion. Swaps with the Bank of Mexico have been at $4.9 billion since July. The central banks of Switzerland, Singapore, and Denmark had small balances left. The rest are gone:

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SPVs: -$2 billion, to $198 billion; -$16 billion since July 1.

The Treasury Department provides the equity capital to the SPVs, and the Fed lends to them. The SPVs then buy assets. The amounts shown on the Fed’s balance sheet include the loans the Fed made to the SPVs and the equity capital contributed by the US Treasury:

  • PDCF: Primary Dealer Credit Facility
  • MMLF: Money Market Mutual Fund Liquidity Facility
  • PPPLF: Paycheck Protection Program Liquidity Facility, with which the Fed buys PPP loans from banks
  • CPFF: Commercial Paper Funding Facility
  • CCF: Corporate Credit Facilities: Buy corporate bonds, bond ETFs, and corporate loans.
  • MSLP: Main Street Lending Program
  • MLF: Municipal Liquidity Facility
  • TALF: Term Asset-Backed Securities Loan Facility

SPVs to nowhere.

For example, the CCF (yellow) with which the Fed buys corporate bonds and bond ETFs, is showing a balance so of $44.8 billion, essentially unchanged for weeks. On September 9, the Fed disclosed that it had bought not a single ETF in August, and that ETF balances actually ticked down, and that its balance of corporate bonds edged up by only $435 million with an M.

This is an indication that the Fed has essentially stepped away from the corporate bond market. Its total holdings of corporate bonds and bond ETFs amounted to $12.7 billion at the end of August. The remaining funds in the CCF account are unused.

MBS: unchanged at $1.95 trillion, level with June 24.

The balance of MBS shows an erratic pattern due to two factors that push it in opposite directions: One, holders of MBS receive pass-through principal payments when mortgages are paid off, and in today’s refinancing boom, this torrent of principal payments reduces the MBS balance by large amounts every month. And two, the Fed’s MBS purchases take 1-3 months to settle, which is when the Fed books the trades.

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Since June 24, the Fed’s MBS balance has essentially remained flat at $1.95 trillion, as the Fed’s purchases just replaced the declines from the pass-through principal payments:

Treasury securities: +$7 billion, to $4.39 trillion.

Since late May, the Fed has increased its Treasury holdings at an average pace of $14 billion a week. This is the net of purchases minus maturing securities that the Treasury Dept. redeems. This week’s increase of $7 billion was within but at the low end of the range:

So it seems the Fed has pulled back from bond-buying. Its Treasury purchases would amount to QE of similar magnitude as seen during QE-3. But the government is issuing so much debt so rapidly to raise the funds for is various stimulus efforts – counted in the trillions – that the Fed is essentially just funding a slice of that spending by buying Treasuries. And that seems to be a signal that the Fed is letting the markets fend for themselves for now. How does that old saw go? Don’t fight the Fed?

There is still a lot of fawning coverage of the Fed in the media, but big dissenters are now given prominent spots, and loaded questions are used to politely hammer Jerome Powell into telling obvious nonsense. Read… Have You Noticed How Push-Back Against Powell-Fed’s Actions Is Getting Louder in the Mainstream Media, from NPR to CNBC?

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