Tuesday, July 21, 2009

Fed Open Market Operations Update III

It's been almost two months since we last posted on the Federal Reserve open market operations so here is our long overdue update.

The Fed has purchased an additional $86.2 billion of treasury bonds since May 27th for a total to date of $216.7 billion:


The Fed has purchased $23 billion in agency debt since May 27th and a total of $116.4 billion since the program started:


The Fed has also purchased an additional $157 billion of agency mortgage backed securities (MBS) since May 27th for a total of $683.6 billion since the program's inception:


Here are the up to date totals for each open market operation type:


Back in May, we predicted that additional treasury bond purchases were likely. So far, this has not materialized. There could be a few reasons for this. First is that long term treasury bonds have rebounded. The 10 year bond now yields 3.49%, down substantially from over 4% only a few months ago. The second reason is that the certain economic indicators have also rebounded. The Fed's projection was to purchase $300 billion in treasury bonds through September. With current purchases already at $216 billion and September rapidly approaching, it will be interesting to see how the Fed proceeds from here. Is the program allowed to expire, will it be renewed or will it be expanded? If yields stay this low we are predicting that the program will be allowed to expire.

And what of the agency and MBS purchases? These programs might be allowed to expire as well but allow us to make a new prediction. We think this program will be rolled into a new program specifically for commercial real estate instead of the existing residential mortgage program. For those paying attention, commercial real estate is experiencing an epic free fall and has emerged as its own crisis in the making. Commercial real estate fell 8.6% in April from the prior month and 7.6% in May from April!

If the Fed is in the business of preventing epic market collapses then it has not choice but to make a move to attempt to stabilize commercial real estate and soon. It is either that or let the banks take massive losses and let the whole thing develop into a new Lehman style systematic banking collapse. Our view? The Fed will try to head off this new crisis before it develops. Whether they succeed is a topic for another day.
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