Wednesday, December 30, 2009

Federal Reserve System Monthly Reports on Credit and Liquidity Programs and the Balance Sheet Dec 9, 2009

FOMC statement releaes Dec 16, 2009

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets...

Guha: Fed narrows policy tools...

With markets normalising and growth returning, the bank confirmed its intention to shut down emergency liquidity schemes in early 2010 and taper off asset purchases by March 31 as part of a long rolling exit from unconventional policy.

Consistent with this, the Fed also dropped another line from prior statements that said it was "monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programmes as warranted".

This appeared to signal that the Fed is reluctant to introduce any new unorthodox schemes and wants to de-emphasise the quantitative easing ("size") and credit easing ("composition") aspects of the balance sheet expansion used to fight the crisis...

Sender: Distressed debt on the wane...

Oakley: Sovereign debt burden

Wednesday, December 23, 2009

Steep yield curve graphs

Mackenzie: steep yield curve

After the Fed reiterated on Wednesday that it would keep its overnight rate low for an extended period, the gap between two and 10-year Treasury yields briefly rose to 276 basis points.

That eclipsed the previous record of 274bp set in August 2003 and the 268bp in July 1992. Steep yield curves in 1992 and 2003 were long-term "buy" signals for equity investors.

"In both of those periods the yield curve accurately signalled future economic expansion and, coincidentally, a great time to buy US equities," said Nicholas Colas, chief market strategist at BNYConvergEx.

This time, however, Mr Colas thinks the outcome may be different, as weak banks, high (and rising) structural unemployment and the moribund housing market "act as natural limiters on how fast this power plant will move the US economy".

Hoyos, Blas: Opec, Iriaq oil surge

The auction promises to bring Iraq's oil production from 2.5m barrels a day to as much as 12m barrels a day within a decade, an increase equal to Saudi Arabia's current output. A significant portion of the oil will arrive far sooner, analysts say...

Tett: CDS market reform

This year the CDS spreads on sovereign debt have swung sharply, as investors have turned to these products to hedge themselves against the danger of a government default (or quasi default). In the case of Greece, for example, the spread is currently around 240 basis points, compared with 5bp three years ago....

Guha: Fed pondders exit strategy

At the heart of the exit sequence debate are five interlocking questions. Should the Fed focus on tightening short-term rates as normal or tightening long-term rates through asset sales?

Assuming the Fed focuses on short-term rates, does it need to reduce the more than $1,000bn excess bank reserves substantially, early in the process and ideally before raising rates?

When it starts raising, should it communicate its policy stance in terms of an interest rate on bank reserves rather than a target for the Fed funds rate as in the past?

chart: FedIf it starts tightening without draining the excess reserves, will it have to move more aggressively than it would otherwise have done? And what is the end destination in terms of the monetary policy regime the Fed wants when the exit is complete?

Thompson: Mexican swaps exchange

Thursday, December 17, 2009

Kay: British fiscal woes

Mackenzie, Thomas: repo dealers fears...

One head of repo at a leading bank was blunter, calling the proposed legislation, “nuclear” for the market. He said the industry is finally waking up to the threat, having assumed the legislation would never get this far.

Potentially, the Financial Stability Act, should it become law, could overshadow current efforts among dealers, clearing banks in tri-party repo and investors, who are trying to reform the repo market some time next year.

“If the bill passes and you trade repo with a bank covered under the new rules, the government can take up to 20 per cent of your principal under a bankruptcy,” says Scott Skyrm, senior vice president at Newedge, a repo broker.

Thomas: Commerial real estate debt restructuring

"Real estate debt for banks is the pig in the python and the question is when it will be digested,” says Patrick Vaughan, a well-known European property investor. “It has looked like it would kill the python.”

The scale of lending across the world – with an estimated £3,000bn ($4,940bn, €3,300bn) of property debt outstanding in the US and Europe – and the ferocity of the crash has meant institutions have not been able to afford action such as in the early 1990s, when panicked banks dumped distressed property in spite of more moderate market declines....

McKenzie: Fed's first step in exit strategy

The Fed's support of the financial system since the end of 2007 has resulted in the creation of excess reserves in the banking system of more than $1,000bn. Economists and investors fear that, should banks start lending these reserves into the broad economy, inflation will surge.

Reverse repurchase agreements can be used to fend off such inflationary pressures. In a reverse repo, the Fed sells assets, such as Treasury securities, to dealers for cash, with an agreement to buy them back later at a slightly higher price. In the process, bank reserves are drained from the financial system.

In the coming weeks, the Fed will move from simulated tests of its reverse repo system with primary dealers to tests involving actual dollar amounts. The likely size of such transactions will remain small and the live tests are designed to not influence market interest rates or indicate any near-term change in monetary policy.,,,