Fed abandons $ 38 billion in treasury bills and MBS in June, abandons MBS at record pace, breaking ‘cap’ for the first time
Where is the Fed’s “U-turn” that Wall Street has promised us?
In June, the Fed ditched the slower-paced Treasuries announced in its new plan for QT, but ditched the fastest-paced mortgage-backed securities (MBS) since QE began to unwind. , for the first time exceeding its “up to” limit. And he’s experiencing the opposite of his QE-era “Operation Twist” – Operation Untwist?
The Fed’s total assets fell by $ 34 billion in June, balance sheet for the week ended July 3, outing Friday afternoon. This includes $ 15 billion in Treasury securities and a record $ 23 billion in MBS, for a total of $ 38 billion, minus some other balance sheet activity unrelated to the QE unwinding. This brought its total assets down to $ 3.813 billion, the lowest since September 2013. Since the start of the era of “balance sheet normalization”, the Fed has lost $ 648 billion. Since QE peaked in January 2015, it has lost $ 687 billion:
Liquidation of the Treasury.
The Fed does not outright sell its Treasury holdings. But when the securities mature, the US Treasury Department pays them back and the Fed does not reinvest that money in new securities. Instead, he destroys that money the reverse way he created it during QE. But the Fed has announced ceilings – “up to” amounts. If the amount of treasury bills maturing in a given month exceeds the cap, the Fed reinvests the excess in new treasury bills. Under the new Fed regime, the maximum amount of Treasury securities allowed to be withdrawn as they mature was $ 15 billion in June. And that’s what happened.
In June, three issues matured, for a total of approximately $ 21 billion. The Treasury Department bought them out and paid them to the Fed. The Fed reinvested $ 6 billion of that money in new treasury securities, but allowed $ 15 billion to withdraw without replacement. As a result, the treasury bill balance fell by $ 15 billion to $ 2,095 trillion, the lowest since September 2013:
Over the past two months, the Fed has started replacing long-term T-bills with short-term T-bills. This is the reverse of “Operation Twist”, which was part of QE, superimposed between QE-2 and QE-3. During Operation Twist, it replaced its short-term T-bills with longer-term T-bills and bonds in order to drive down recalcitrant long-term yields.
Now he’s starting to do the opposite, albeit in only small amounts. Short-term bills first appeared in her weekly reports dated May. In the current balance sheet, it lists $ 5 million, with the first batch maturing on July 9, the second batch in August. The Fed seems to be testing what it said was implemented after September: replacing long maturities with short-term bills to lower the average maturity of its portfolio.
If Operation Twist was successful in depressing long term yields during QE – doubts remain – then ‘Operation Untwist’ should do the opposite and put upward pressure on long term yields.
Securities backed by mortgages
MBS securities differ from ordinary bonds: holders receive transferred principal payments, as the underlying mortgages are either paid off through monthly mortgage payments or paid off when the house is sold or the mortgage is refinanced. Any remaining capital is repaid at maturity.
About 95% of residential MBS on the Fed’s balance sheet – they are issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae – mature in more than 10 years. Thus, the current runoff is almost exclusively due to transferred principal payments.
These transmitted principal payments vary with fluctuations in mortgage interest rates: falling mortgage rates cause homeowners to refinance their mortgage, meaning their old mortgages are paid off and the principal is transferred to MBS holders.
Mortgage rates hit a multi-year high last November, and mortgage refi applications fell to a decade low in December. But mortgage rates have since fallen and refi requests have increased, according to the Mortgage Bankers Association. And the flow of principal payments transferred has also increased – and the Fed is taking advantage.
In June, the MBS balance fell from $ 23 billion to $ 1,533 billion. It wasn’t only the biggest run-off since QE started, but it also broke the $ 20 billion cap – another first! In May, the second round first hit the cap of $ 20 billion, but did not exceed it:
The action on MBS confirms that the Fed is anxious to get rid of it as soon as possible. His new plan is to get rid of all of them, although he has to sell them up front if the principal payments passed through slow too much, as he said. From the end of this year, it will start replacing MBS with Treasuries. Meanwhile, the Fed is making hay while the sun is shining – given the increase in mortgage refis and principal payments transferred and the prospect that when mortgage rates come down this flow of principal payments transferred will slow down.
Let me kick this off so we can have some fun: The Fed has already accomplished more with its verbiage so far this year than it did in the past when it cut rates to zero and carried out billions of dollars in quantitative easing. We are already seeing the first results. Here’s why. Lily… The Fed’s Stealth Stimulus Has Arrived
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