Next week there is another Fed meeting. I think we should expect a very interesting week.
Today the bank’s strike continued – they forced Feds to lend them $3.75 bln at 2.74%, which is 76 bps below target rate. Only 10 days ago they were happy to bid at 4.1%. I think they hint that it would be nice to have another 75 bps cut.
But there is another interesting thing to watch. Yesterday Uncle Ben wet his pants and gave them $7.5 bln with mortgage collateral. I think those mortgages are like hot potato and they won’t be happy to get all of them back. I’m curious to see what will be the bid to push them back to Feds?
I also want to point to the important change in my language. I used to say “Feds drained funds”, “Feds added”. I’m not saying that anymore. When banks are bidding to borrow at 2.74% and Feds are refusing to lend too much I’m saying that this new monetary policy is controlled by banks, not Feds.
I also want to observe that Feds are reluctant to lend too much with agency and mortgage collateral – I think it happens because they want to drain some long-term treasury notes in order to control the mortgage rates, as 30-year fixed mortgage is loosely correlated with 10Y yields
January 25, 2008 at 9:00 pm
theroxylandr wrote:
“I think it happens because they want to drain some long-term treasury notes in order to control the mortgage rates, as 30-year fixed mortgage is loosely correlated with 10Y yields”
I think it has begun to decouple. Mainly because no investor wants to touch mortgage backed securities. All of the mortgages are going through the GSEs, which investors believe are federally guarenteed not to default. Sooner or later some bad news is going come out of the GSE’s and investors will likely pause to wait to hear the at Treasury Dept is going to bailout the bad loans, Considering the state of the housing market that may not be very long (perhaps when the GSEs report Q1 2008 results). If the gov’t fails to bailout the GSEs all hell is going to break out.
FWIW: I think the next 6 months are going to get very interesting, as the problems mount and the solutions are failing short.
January 26, 2008 at 1:08 am
Mainly because no investor wants to touch mortgage backed securities.
Yes. Securitization as it ran before is dead. The problem for housing: shrinking demand as prices keep falling, and unloading mortgage risk is now a lot more difficult. This is why…
If the gov’t fails to bailout the GSEs all hell is going to break out.
…liberalization of GSE operating rules is part of the “stimulus”. But they may also be ‘pushing on a string’ because would be homeowners will not return to the market until prices stabilize, but the pool of potential buyers has shrunk dramatically (subprime, Alt-A, etc are also dead) while the supply grows.
As I suggested before, you may also ultimately see taxpayers assume the liabilities of the bond insurers — compared to wealth destruction/asset deflation on a massive scale, it’ll be seen as the lesser of two evils.
January 26, 2008 at 11:09 am
I wonder if GSE’s are really dreaming to purchase those new jumbo loans? They can’t be forced, can they?
January 27, 2008 at 1:18 am
[...] websites questioned why the Fed was bailing out the stock market as that is not their mandate. Just who is in control, the Fed or the [...]
January 27, 2008 at 2:02 pm
The FED has become overly concerned about managing consumer expectations,this is always the danger with mass communications the folks with access begin to believe they can manage via public announcements and grand actions. The FED continues to make grandstanding actions away from their normal meeting schedule gaining greater market and public attention that they are in control.