Tuesday, December 14, 2010

« Not So Well Known - Tracking The Fed's OTHER Criminal Debt Monetization Program »

The program in question isn't talked about frequently. It is a completely separate criminal approach to monetizing the national debt through Treasury purchases.

Background reading:

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NEW YORK (Source - Reuters) - The recent spike in U.S. Treasury yields could whittle down prepayments on the Federal Reserve's $1 trillion mortgage investments and reduce the cash it reinvests into federal government debt.

The Fed's reinvestment of proceeds from maturing mortgage securities, which began in August, was aimed at maintaining its ultra-loose monetary policy. It is a separate move from its controversial $600 billion Treasuries purchase program, dubbed QE2, which started three months later.

The Federal Reserve Bank of New York said in November that reinvestments were expected to total $250 billion to $300 billion by the end of the second quarter of 2011. However, a slowdown in mortgage prepayments due to the surge in home loan rates could pare the Fed's reinvestment into Treasuries from mortgage assets by as much as $100 billion, said Eric Green, chief of U.S. rates research and strategy at TD Securities in New York.

Barclays Capital analysts see a similar slowdown in the wake of the current bond sell-off, downgrading annual paydowns on the Fed's mortgage holdings to about $175 billion from their earlier forecast of $278 billion. This means $8 billion to $9 billion less monthly reinvestment by the Fed.

Last week, the contract rate on U.S. 30-year mortgages, excluding points and fees, averaged at 4.66 percent, the highest since late July, the Mortgage Bankers Association said on Wednesday. The average 30-year loan rate has risen 0.38 percentage points from a month earlier. The MBA's mortgage activity index, meanwhile, fell 28 percent in the week ended Dec 3 from a month earlier.

The 10-year Treasury yield, which is the benchmark for the 30-year mortgage rate, has risen about three-quarters of a percentage point over the last month and hit a six-month peak of 3.29 percent on Wednesday.

Compounding the market sell-off this week was a proposed deal between Democratic U.S. President Barack Obama and Republican lawmakers to extend Bush-era tax cuts and to reduce payroll taxes.

The Fed's initial bout of bond buying that began in mid-November comprised $75 billion for QE2 and $30 billion for its mortgage reinvestment program.

Continue reading at Reuters...

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More on this from Bloomberg...

The Fed has bought $106.3 billion in Treasuries on its way to purchasing $600 billion of government debt through June 2011. Separately, it has purchased $75.8 billion of Treasuries as part of its plan, announced in August, to reinvest maturing mortgage holdings. The second round of unconventional monetary easing is aimed at spurring economic growth and preventing inflation from falling too low.

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Alternate Treasury Purchases Increase by Fed

Two of the 16 securities the Fed purchased today carried a interest-rate coupon of over 10 percent, including a 10.625 percent note maturing Aug. 15, 2015, and one with a 11.25 percent coupon that comes due on Fed. 15, 2015.

  • “Some of the securities the Fed purchased have been floating around for a long time,” added McCarthy. “Whoever owned them made a massive profit.”

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