Sunday, March 14, 2010
The first thought for the day: the Fed's unwinding (i.e., exit) continues, and mortgage rates will be under pressure without the Fed even touching the policy target. The Fed's MBS program is set to expire March 31, 2010. The Treasury's program has already expired.
According to my calculations - you have to track the net purchases at the NY Fed rather than the weekly H.4.1 statement of Fed holdings due to the delayed settlement dates - the Fed now holds $1.226 tn in MBS through March 10, 2010, or 98% of its total allocation, while the Treasury holds a $192 bn. Together, the government holds $1.42 tn in GSE-backed MBS. That's 26.4% of the entire stock of outstanding Agency-backed MBS (see the recent Q4 Flow of Funds, table L.125).
I attach a positive probability to the Fed raising the MBS purchase program limits (don't really know what a limit is when the Fed prints the money); they won't double it, but maintain a slightly positive flow.
The asset purchase program was a success. Just look at mortgage spreads since the program's start.
Spreads will likely widen once the flow stops. I've heard estimates that mortgage rates will rise roughly 40-50 bps (of course, that's just a guess because nobody has a clue).
The housing market remains in shambles. Demand is low, the unemployment rate is high, and the shadow inventory (i.e., foreclosures in the pipeline that will eventually turn into a home for sale) is sizable.
Any reference to housing must include links to Calculated Risk blog - I just browsed through the history, and here , here, here, here, and here are a few articles of note. Whatever improvements there have been are riding on the wave created by the Fed's $1.25 tn in MBS purchase program.
The Fed has already "implicitly" tightened simply by reducing the flow of asset purchases and closing emergency liquidity facilities (notice that TAF lending is down roughly $460 bn since last year). And with the velocity of money showing little, if any, sign of recovery, it's hard to imagine further tightening, especially when the Treasury is in selling mode.
The Fed must react to the fiscal policy, and that for the housing market is tight: the first-time homebuyer credit set to expire in April (that could, of course be extended too), and the Treasury is selling MBS. We'll see; but given the fragility of the economy at this point in time, don't count out further credit easing on the part of the Fed.
The other big news today is that the St. Patrick's Day parade in South Boston, MA will go on. I should note that I live in "Southie", and it is raining cats and dogs right now.
This parade has a long history, dating back to 1901. I attended the parade two times (lived in Southie for three years now), and it is a hoot. They have horses, the Boston Fire Department, bands, pipers, and so much more. Here are some neat photos of the parade in the 1960's.
The big to-do on St. Patrick's Day is to attend a party on the parade route. And those are being canceled left and right. (I wasn't planning to attend any such party because I have other annoying things on my plate right now.) Next year, I'll have a News N Economics party in Southie for the St. Patrick's Day parade. We're not directly on the parade route, but close enough.