Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Posts Tagged ‘Fed’s quantitative easing’

Fed Doves Promoting More Socialized Housing

Posted by Larry Doyle on October 14th, 2009 4:17 PM |

Could the S in USA be changing from ‘states’ to ‘socialist?’ Maybe that is overly aggressive, but why do I ask?

If the markets are an indication of an incipient rebound in economic health, then why would certain Federal Reserve governors want to increase the Fed’s quantitative easing program? Is that accurate? Is the Fed actually looking to inject even more capital and liquidity into our housing market over and above the $1.25 trillion commitment they have already made? Recall that the Fed informed the markets that it would extend the current purchase program of MBS (mortgage-backed securities) until the end of the 1st quarter 2010, while not increasing the dollar commitment.

Also recall that there had been an increase in Fed-speak by certain Fed representatives (Kevin Warsh, Thomas Hoenig) about the need for an increase in rates ‘sooner rather than later,’ along with the need for a defined exit plan by the Fed from its massive injection of liquidity into the markets.

Well, take those comments with a large grain of salt. Why? Today we learn that there are ‘doves‘ within the Fed who believe the Fed should commit even more money to support our housing market. Bloomberg provides insights on this topic by writing, Fed Says Some Officials Were Open to Buying More MBS:

Some Federal Reserve policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to stimulate the economy amid concerns the recovery may fade.

“Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS could help to reduce economic slack more quickly,” according to minutes of the Federal Open Market Committee’s Sept. 22-23 meeting released today in Washington. One member said the improvement in the outlook could warrant a reduction in purchases, the minutes said, without identifying the policy maker.

Having read and reviewed more Fed statements  than I care to remember, each and every word in a Fed statement is very carefully chosen. Why? The Fed is attempting to manage market expectations. The fact that the Fed chose to release these comments about mortgage purchases is an indication that the Fed will not only keep the liquidity spigot on for an ‘extended’ period but also may increase the flow of liquidity into the economy via increased purchases of mortgage securities. What does that mean? They view the economy as still having real weakness, especially in housing. And what does that mean? Little concern of inflation in general and likely deflationary pressures within housing.

To fight the deflationary pressures, the Fed will continue to pump liquidity. Are there any costs to this increased liquidity? The equity markets are rallying so it must be good. Well, not so fast. Actually, the costs are in the form of ongoing weakness in the dollar. The U.S. Dollar Index moved lower by another .65%  today.

When you truly look at the economy and the markets, think of things in terms of purchasing power. The dollar is now down approximately 7% on the year. I would encourage people to more actively assess the value of the dollar in terms of asset returns and incorporate that into the cost of products.

Those dollar weighted returns and dollar weighted costs in the context of a global market and global economy are truly the proper perspective.


Why Might the Fed Stop Buying Mortgage-Backed Securities?

Posted by Larry Doyle on August 27th, 2009 10:28 AM |

Will the Federal Reserve surprise the markets and not fully purchase the $1 trillion+ worth of mortgage-backed securities via its quantitative easing program? Why would the Fed slow, if not stop, its mortgage purchases? What might this mean for mortgage rates?

Bloomberg highlights this potential development this morning in writing Lacker Says Fed May Not Need To Buy MBS Authorized:

The Federal Reserve may not need to buy the full $1.25 trillion in mortgage-backed securities the central bank has authorized by year-end as the economy improves, Federal Reserve Bank of Richmond President Jeffrey Lacker said.

“I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide,” Lacker said today in a speech in Danville, Virginia.

The Bloomberg story follows up on news released by the Fed that it had decreased and changed the money managers through which it has purchased mortgage securities. The New York Fed released a statement on August 17th highlighting this development, New York Fed Streamlines External Investment Managers for Agency MBS Purchase Program:

The Federal Reserve Bank of New York today announced that it has streamlined the set of external investment managers for the agency mortgage backed securities purchase program, reducing the number of investment managers from four to two. The New York Fed has retained Wellington Management Company, LLP for trading, settlement and as a secondary provider of risk and analytics support; and BlackRock Inc. as the primary provider of risk and analytics support.

Let’s address some basic questions about the Fed’s MBS purchase program, MBS in general, and implications for the economy.

1. Which money managers were removed by the Fed?

>> Goldman Sachs Asset Management and Pimco

2. Why might the Fed slow its purchasing of MBS?

>> While Fed governor Lacker would maintain that the Fed may slow its purchasing of MBS because the economy has improved and continues to improve, I would beg to differ. Home sales are rebounding, but delinquencies and foreclosures are running at record pace. Those statistics, in my opinion, continue to cast dark clouds on our housing landscape.

The Fed’s purchasing of MBS has skewed this market and implicitly crowded out private investors from buying these assets at higher rates.

3. How are MBS valued?

>> When the Fed or any other investor purchases a MBS, the return is determined not merely by the coupon on the bond but also by the rate of prepayment. That prepayment rate is an option the homeowner has and the purchaser of MBS effectively sells.

The value of this prepayment option needs to be weighed when evaluating MBS. How is this done? As with any option in the market, valuation factors include volatility and time to option expiration.

In the current market environment, mortgage valuations are EXTREMELY RICH. How so? The OAS (option adjusted spread) an investor can expect to receive in purchasing a 30yr MBS security is BELOW Libor, which is the effective borrowing rate for most banks.

4. What does this mean?

>> While the U.S. Treasury issues debt along the entire yield curve (1 month to 30 yrs), the Fed is purchasing MBS effectively at valuations which are negative to funding. That differential is the implicit subsidy Uncle Sam is providing to homeowners.

5. What happens if and when the Fed slows its MBS purchases?

>> Mortgage rates will move higher to a level at which private investors deem MBS to represent fair value. How much higher? I would guesstimate at least .25% and more likely .50%-.75%.


Economic/Market Highlights . . . 12/17: “The Golden Rule”

Posted by Larry Doyle on December 18th, 2008 7:00 AM |

For time immemorial, nations and economies have operated by the Golden Rule. Well, in this economy and this market, that Rule is strong and seemingly getting stronger. While the U.S. dollar sank to a 13yr low vs the Japanese Yen and declined another 2+% vs the Euro, gold moved higher by another 2+% and is now at a 9 week high and up 9% for the year.

In speaking with an investment advisor today, he told me that he has moved almost 20% of his fund into gold in anticipation of continued declines in the value of the dollar.

While gold is increasing in value, we are not seeing other commodities follow its lead. In fact, oil (down 7% on the day) intraday went below $40 per barrel, while copper dropped to a near 4yr low. Through the grapevine, a close friend shared with me today that Goldman is long oil in SIZE from a very large transaction with Mexico. Both commodity moves indicate to me that the market believes the economy will bump along the bottom for the foreseeable future.

What is going to get us to turn the corner on the economy? The Fed has done all it can monetarily, and will clearly utilize “quantitative easing” in buying longer maturity mortgage, consumer, and corporate assets. There is another $350 billion in TARP funds, some of which will likely be directed towards helping homeowners on the brink of foreclosure.

Beyond that, all eyes in Washington and across the country are looking toward a MASSIVE economic stimulus. Obama has already indicated the outlines of his plans with the largest component being infrastructure.

Will this be the “magic bullet” that we all hope? It would be foolhardy to think that $300 billion, if not $500 billion, and perhaps $1 trillion, would not give a serious jolt to our economy. That said, will a package of the size and type being discussed by Obama revolutionize the art of stimulus packages and lead us to a viable and sustainable economic recovery? I think not. Why? (more…)

Recent Posts