Fed Goes Nuts with Repos & T-Bills but Sheds Mortgage Backed Securities
The fastest increase in assets for any two-month period since the post-Lehman freak show in late 2008 and early 2009.
Total assets on the Fed’s balance sheet, released today, jumped by $94 billion over the past month through November 6, to $4.04 trillion, after having jumped $184 billion in September. Over those two months combined, as the Fed got suckered by the repo market, it piled $278 billion onto it balance sheet, the fastest increase since the post-Lehman month in late 2008 and early 2009, when all heck had broken loose – this is how crazy the Fed has gotten trying to bail out the crybabies on Wall Street:
In response to the repo market blowout that recommenced in mid-September, the New York Fed jumped back into the repo market with both feet. Back in the day, it used to conduct repo operations routinely as its standard way of controlling short-term interest rates. But during the Financial Crisis, the Fed switched from repo operations to emergency bailout loans, zero-interest-rate policy, QE, and paying interest on excess reserves. Repos were no longer needed to control short-term rates and were abandoned.
Then in September, as repo rates spiked, the New York Fed dragged its big gun back out of the shed. With the repurchase agreements, the Fed buys Treasury securities and mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, or Ginnie Mae, and hands out cash. When the securities mature, the counter parties are required to take back the securities and return the cash plus interest to the Fed.
Since then, the New York Fed has engaged in two types of repo operations: Overnight repurchase agreements that unwind the next business day; and multi-day repo operations, such as 14-day repos, that unwind at maturity, such as after 14 days.
Total repos on the Fed’s balance sheet at the end of the day on November 6 amounted to $215 billion, unchanged from the prior week, and up $34 billion from a month earlier (Oct 2 balance sheet):
- $62.5 billion in overnight repos that the Fed took on Wednesday morning. These repos unwound Thursday morning. All prior overnight repos had already unwound before the date of the balance sheet.
- $152 billion in four multi-day repos – Oct 24, Oct 29, Nov 1, and Nov 5 – that had not yet unwound as the evening of Wednesday, Nov 6.
Treasury Securities jump: T-Bills at work.
During the month through the balance sheet as of Nov 6, the total amount of Treasury securities jumped by $77 billion. Most of this increase was due to the Fed’s switch to Treasury bills (T-Bills).
T-bills mature in one year or less. For the last few years, there had been no T-bills on the Fed’s balance sheet, which had been stuffed with longer maturities to force down longer-term interest rates. But this year, the Fed has abandoned that strategy. It is buying T-bills outright to raise excess reserves as part of its battle with the repo market, and it is replacing longer-dated securities that are maturing with a mix of securities that now include T-bills. And T-bills have surged from nothing to $66 billion, bringing total Treasury securities to $2.194 trillion:
Mortgage-Backed Securities fall off
In October, the balance of Mortgage Backed Securities (MBS) dropped by $21 billion, exceeding the self-imposed cap of $20 billion per month for the sixth month in a row. At $1.45 trillion, MBS are now below where they had first been in November 2013:
Over the last six months, the Fed has shed $138 billion in MBS, exceeding its $120 billion cap for the period, and showing how intent it is in getting rid of them, even as it is loading up on T-Bills and repos.
Like all holders of MBS, the Fed receives pass-through principal payments as the underlying mortgages are paid down or are paid off. About 95% of the MBS that the Fed holds mature in 10 years or more, and the runoff is almost entirely due to these pass-through principal payments.
The Fed has stated that it wants to get rid of its MBS entirely because one, they’re awkward for conducting monetary policy; and two, they’re housing debt, and by holding them, the Fed gives preferential treatment to this debt over other forms of private-sector debt, and it said it wants to end assigning these kinds of preferences.
As expected, loading up on short-term securities, at the expense of long-term securities, has put downward pressure on short-term yields, and upward pressure on longer-term yields that have already risen, with the 10-year yield hitting 1.92% today, the highest since the end of July.
So the Fed is increasing its assets in huge post-Lehman-like leaps, with the $184 billion jump in September and the $94 billion jump in October to bail out the crybabies on Wall Street, so that the higher rates in the repo market won’t blow up some over-leveraged hedge funds or REITs that borrow in the repo market short term to cheaply fund their long-term bets.
Because indeed: Whose Bets are Getting Bailed Out by the Fed’s Repos & T-Bill Purchases? Read… What’s Behind the Fed’s Bailout of the Repo Market?
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