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