Fed’s QT Total Assets Drop by $206 Billion from Peak – Investment Watch

Guest post by Wolf Richter from his blog at WolfStreet.com:

What the Fed did in details and charts. And, well, “Primary Credit” is starting to appear again.

The Federal Reserve published this afternoon its weekly balance, with balances yesterday, October 5, which contained the end-of-month drop on September 30 of Treasury securities, which completed the first month of QT at full speed, after the three -gradual entry period.

At full speed, the QT pace is limited to a maximum of $60 billion per month for Treasuries and a maximum of $35 billion for MBS. During the three months of entry, the limits were half that level.

Total assets were down $37 billion from the previous week, down $63 billion from the balance sheet released on Sept. 8 and down $206 billion from their peak on April 13, to $8.76 trillion. dollars, the lowest since December 2021.

QT is the opposite of QE. With QE, the Fed created money that it injected into the financial markets by buying securities from its main dealers, who then sent that money chasing assets all over the place, inflating asset prices and driving down yields, mortgage rates and other interest rates. QT does the opposite and is part of the explicit tools the Fed uses to control this raging inflation.

Treasuries: $137 billion below peak.

Bonds and Treasury bonds they mature in the middle of the month and at the end of the month, which is when the maturing bonds come off the balance sheet. Today’s balance sheet includes the drop on September 30.

treasury bills. In those months when not enough Treasuries and bills mature to approach the $60 billion limit, the Fed also allows short-term Treasuries (maturities of one year or less) to run down by make up the difference. And that happened in September.

Treasury Inflation Protected Securities (TIPS) pay inflation compensation based on the CPI. This inflation protection is income to the Fed, but it is not paid out in cash, as coupon interest is, but is added to the principal value of the TIPS, and the TIPS balance on the Fed’s balance sheet in few centimeters to the next TIPS. issue expires, which will be in January.

In September:

  • Development of Treasury bills and bonds: $43.6 billion.
  • Development of Treasury Bills: $13.1 billion
  • ADVICE roll-off: head matured; the next issue will come in January
  • TIPS Inflation Compensation: $235 million, non-cash income added to TIPS principal.
  • Net change: -$57 billion since September 7.

MBS, 2-3 months late: $42 billion below peak.

MBS come off the balance sheet mostly through rolled-over principal payments. When the underlying mortgages are paid off as the home is sold or when the mortgage is refinanced, or when regular mortgage payments are made, the mortgage servicer (like your bank) remits the principal to the entity that securitized the mortgages (such as Fannie Mae), which then forwards these principal payments to the holders of the MBS (such as the Fed). The book value of the MBS is reduced with each rollover principal payment, reducing the amount on the Fed’s balance sheet.

But mortgage refinancing volume has collapsed 86% from a year ago to the lowest level since 2000; by then, the Fed had also embarked on a series of rate hikes, eventually taking them to 6.5%. Collapsing refi volume has turned refi rollover principal payments into a trickle.

In addition, home sales have slowed, further reducing downpayments. Principal payments transferred from regular mortgage payments continue at their normal rate.

The fading of principal transfer payments from the refi business is why the Fed is considering selling MBS directly in the future to fill the gap up to the $30 billion cap.

MBS appear on the balance sheet 1-3 months after the Fed buys them in the “To Be Announced” (TBA) market. These trades take between one and three months to settle and the Fed records them after settlement, which is when the trades appear on the balance sheet.

For a special deep dive on the Fed’s MBS trades in the TBA market and the delays involved, go to my analysis from a month ago and scroll down to the section: “MBS, Creatures with a Big delay”.

Thus, for most of the phase-in period, MBS transactions did not reflect the phase-in period, but rather the previous “Taper”. In September and October, we are seeing the transactions of the phase-in period.

The Fed stopped buying MBS on September 16, so the inflow of new MBS onto the already small balance sheet will run out in November.

The mismatch in time between the days transactions are established and appear on the balance sheet and the days the principal transfer payments are recorded and come off the balance sheet gives the graph the jagged line, with flat parts in between. when neither happens.

MBS had one such flat spot this week, at $2.698 trillion, up $11 billion from September 8 and $42 billion from its April 13 peak.

Unamortized premiums: Down $32 billion from peak to $323 billion.

All bond buyers pay a “premium” over face value when they buy bonds with a coupon interest rate higher than the market yield at the time of purchase for that maturity.

The Fed records the face value of the securities in regular accounts and records the “premiums” in an account called “unamortized premiums.” It amortizes each bond’s premium to zero over the remaining maturity of the bond while receiving the highest coupon interest payments. When the bond matures, the premium has been fully repaid and the Fed receives the face value and the bond is off the balance sheet.

Unwritten premiums peaked in November 2021 at $356 billion and are now down $32 billion to $323 billion:

A note on “Primary credit.”

The Fed borrows money from the banks when banks put cash on deposit with the Fed (the “reserves”). The Fed currently pays banks 3.15% interest on $3.08 trillion in reserves. They are a liability on the Fed’s balance sheet, not an asset, and they don’t belong here. I only brought them up because…

The Fed also lends money to banks and it currently charges 3.25% for it, charging more interest than paying interest, as all banks do. The Fed does this through the discount window, called “Primary Credit” on the Fed’s balance sheet.

In March 2020, primary credit increased to $50 billion, but faded quickly and remained at very low levels. When the Fed began raising rates in early 2022, primary credit began to rise, although it has remained low. At today’s balance sheet, it rose to $7 billion, having doubled in the past four weeks.

Most banks seem to have too much cash and deposit some of it with the Fed ($3.08 trillion in total reserves); but some banks don’t have much cash, and owe it to the Fed at 3.25% (a total of $7 billion). In terms of magnitude, there’s no comparison, but it’s still beautiful:

And this is how we got to Raging Inflation:

Guest post by Wolf Richter from his blog at WolfStreet.com.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *