Posted by desertrat on 5th of Aug 2010 at 01:49 pm
bernake hinted about it in his testimony last week. they are
going to institute a streamline refi process for folks that are
underwater thus the reason the rates keep dropping. read this
...........
1) A
change in the reinvestment policy would be aimed at avoiding a
passive shrinkage of the Fed's balance sheet. Although the
Fed's buying program ended in March, their portfolio of
MBS has not yet started to contract because a significant
portion of the purchases were for forward settlement
-- the settlement of these transactions has just about offset
the impact of prepayments and the Fed's overall MBS holdings have
remained fairly steady (see attached chart). However, just
about all of the forward trades had settled as of the end
of July. So, the underlying shrinkage in the principal balance
related to prepayments should now start to become more apparent
absent any new action.
2) Even though
prepay speeds are slower than would be expected given the
current rate environment, Colin Teichholtz estimates that
prepayments will lead to about a 2% per month decline in the Fed's
MBS portfolio going forward from here. On a base of $1.12 trillion
of holdings, that amounts to about $20 bil per month. 3) A
near term decision on this issue is probably dependent on the
outcome of Friday's employment report. We suspect that
another weak report would lead to adoption of the reinvestment
change at next Tuesday's FOMC meeting. 4) From our
standpoint, it would make a lot of sense to combine a Fed
reinvestment program with measures aimed at streamlining the refi
process (as outlined in our "Slam Dunk Stimulus"
proposal). However, the Fed does not really have any authority
over the GSE's or the mortgage origination process -- that would be
up to the FHFA and the Treasury Dept. The motivation for a change
in the Fed's reinvestment policy seems to be merely related to
avoiding balance sheet shrinkage. 5) The MBS market is
still reeling from the disruption caused by the Fed's massive
buying -- fails are running near historic highs and liquidity is
abnormally low. Thus, we suspect that the Fed would buy Treasuries
-- rather than MBS -- if they do decide to reinvest the principal
repayments. And, they would probably concentrate their
buying in the short coupon sector since that would make
for the easiest exit strategy, thereby appeasing the hawks.
Newsletter
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!
its coming!! if jobs number is bad tomorrow FOMC will react tuesday!
An August Surprise from Obama?
Posted by desertrat on 5th of Aug 2010 at 01:49 pm
bernake hinted about it in his testimony last week. they are going to institute a streamline refi process for folks that are underwater thus the reason the rates keep dropping. read this ...........
Fed – David Greenlaw comments on the WSJ story today, “ Fed Mulls Symbolic Shift ”:
1) A change in the reinvestment policy would be aimed at avoiding a passive shrinkage of the Fed's balance sheet. Although the Fed's buying program ended in March, their portfolio of MBS has not yet started to contract because a significant portion of the purchases were for forward settlement -- the settlement of these transactions has just about offset the impact of prepayments and the Fed's overall MBS holdings have remained fairly steady (see attached chart). However, just about all of the forward trades had settled as of the end of July. So, the underlying shrinkage in the principal balance related to prepayments should now start to become more apparent absent any new action. 2) Even though prepay speeds are slower than would be expected given the current rate environment, Colin Teichholtz estimates that prepayments will lead to about a 2% per month decline in the Fed's MBS portfolio going forward from here. On a base of $1.12 trillion of holdings, that amounts to about $20 bil per month. 3) A near term decision on this issue is probably dependent on the outcome of Friday's employment report. We suspect that another weak report would lead to adoption of the reinvestment change at next Tuesday's FOMC meeting. 4) From our standpoint, it would make a lot of sense to combine a Fed reinvestment program with measures aimed at streamlining the refi process (as outlined in our "Slam Dunk Stimulus" proposal). However, the Fed does not really have any authority over the GSE's or the mortgage origination process -- that would be up to the FHFA and the Treasury Dept. The motivation for a change in the Fed's reinvestment policy seems to be merely related to avoiding balance sheet shrinkage. 5) The MBS market is still reeling from the disruption caused by the Fed's massive buying -- fails are running near historic highs and liquidity is abnormally low. Thus, we suspect that the Fed would buy Treasuries -- rather than MBS -- if they do decide to reinvest the principal repayments. And, they would probably concentrate their buying in the short coupon sector since that would make for the easiest exit strategy, thereby appeasing the hawks.