The Horror......The Horror.

Starting today, Treasury will begin it's monthly sale of $75 billion notes and bonds. Today they will auction off $37 billion 3-year notes, followed by $23 billion 10-year notes tomorrow and finally $15 billion 30-year bonds on Thursday. The Financial Times, Record $75 Billion Treasury Sale to Test Bond Investors. reports;

While the central bank is expected to reiterate that rates will remain low for an extended period, investors are focused on the outlook for the Fed's policy of purchasing Treasuries and mortgages.

The Fed has nearly completed meeting its target of buying $300bn in Treasuries, with about $250bn already purchased. But last week, the Bank of England decided to boost its quantitative easing limit. That has some people thinking the Fed could seek to buy more Treasuries in order to keep market rates low.

At its current pace of buying, the Fed's Treasury programme should finish in six weeks, while the purchase of $1,250bn in mortgages should be completed by the end of the year.

Some analysts think the Fed should adopt a flexible approach and extend the terms of the Treasury buying programme until the end of the year.

That way, the Fed could buy fewer mortgages and more Treasuries, should yields rise sharply in the coming months.

Have things been screwed up for so long that the we just don't see the insanity and the futility of this exercise? Every month, due to our sky-rocketing deficits and the official government policy on capping mortgage rates, the Fed has to run around like the Keystone Cops trying to offset the effect of new treasury supply. They do this by buying some concoction of Treasury notes and Mortgage Backed Securities, taking losses all the way, as the natural effect of supply and demand, as well as increasing market duration, takes yields higher and higher. The Federal Reserve has become a comedy act, running around on a gigantic "Fools Errand" at least once a month.

How long will it take before the institution of the Federal Reserve loses all its credibility? Their willing involvement to participate in a political program to artificially cap key interest rates and pump up, or at least artificially support the value of gigantic asset classes like residential and commercial mortgages is both futile and embarrassing. Is anybody keeping score as to whether any "gains" we might be getting by keeping primary residential mortgage rates low has offset the losses the Fed has taken on their MBS and Treasury portfolios? I don't think so.

Yesterday, Maguire Properties, the largest office landlord in Los Angeles, handed the keys to seven properties over to their creditors (special purpose CMBS vehicles). This is starting to go on all over the country. The commercial real estate sector in this country is now suffering from the same things that residential mortgages have already suffered;

• The loans were horribly underwritten.
• The borrowers were a combination of bad and over-leveraged.
• The borrowers had little real skin in the game.
• The value of the underlying collateral was driven up by extremely cheap credit, provided in large part by the Wall Street securitization machine.

The game is over now. The government's answer is to expand the Fed's TALF program to commercial mortgage backed securities (CMBS)? This isn't a liquidity problem! The bonds and loans are bad! They have learned NOTHING from the residential mortgage crisis! How is the Treasury's Public Private Investment Partnership (PPIP) going for residential mortgages? It's NOT EVEN GOING! The only way TALF can work even a little bit for CMBS is if somehow the rating morons can keep the "AAA" CMBS AAA. How are they going to do that when commercial real estate is down at least 30% from when most of the loans were made and borrowers are failing by the dozens? Unless they commit fraud (which isn't beyond the realm of possibility for them) they can't.

The question now is, will the Fed help Treasury engage in another Japanese style exercise wherebye putrefying assets are kept on bank books at cost, clogging up balance sheets and creating a legion of zombie banks? Everything that I have seen in the last twelve months tells me that they will and that scares the crap out of me.

by Monkey Business Blog