Home / Investing / The Fed repos are falling to the level of October, the T-Bills increase, but the MBS fall and the total assets decrease even more – Investment Watch

The Fed repos are falling to the level of October, the T-Bills increase, but the MBS fall and the total assets decrease even more – Investment Watch

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Those who have the endless "No-QE" of the Federal Reserve or whatever to inflate the market may be disappointed.

By Wolf richter for WOLF STREET.

The Fed had soaked the market with $ 410 billion in liquidity between September and January 1 through its repository operations and its T-bill purchases. The market exaggeration hoped that this dizzying pace of money printing will continue, but wait … While T-bill purchases continue, the repos on the Fed's balance sheet are falling apart, its mortgage-backed securities (MBS) continue falling and total assets in its balance sheet fell to the lowest level since mid-December.

Repos fall.

Under these repurchase agreements, the Fed offers to purchase Treasury securities, MBS and agency securities from counterparties with an agreement to sell those securities to counterparties at a price set on a specific date, such as the following day (repos of night) or in 14 days or some other period (term repos). When a repurchase agreement expires, the Fed recovers the money it had delivered and returns the securities to the counterparties. Is zero that particular repository on the Fed's balance sheet.


When the Fed buys securities under a repurchase agreement, the amount it pays adds liquidity to the market. When that repository relaxes, and the Fed recovers its cash and returns the securities, it drains this liquidity from the market.

Every day, the old breaks relax. And every day, the Federal Reserve offers new repositories. This is a constant input and output. The balance changes every day, but has been in an uneven decline since the peak of January 1.

The total amount of repos in the Fed weekly balance sheet As of January 22, released this afternoon, it has now fallen by $ 70 billion from the peak of January 1 ($ 256 billion), to $ 186 billion. This is below where I had been for the first time on October 16:

The fall of $ 43 billion in repos in the last seven days was largely due to a repository of $ 50 billion of 32 days, which dates from December 16, which unrolled on January 17. do not replaced by another 30-day repository, and there is no more than 30-day repos in the Fed's calendar or balance of repositories.

T-Bills arises.

Last year, before the repossession market broke out, the Fed said in a series of announcements that it would replace some of the Treasury securities with maturities of T letters (Treasury bonds with maturities of one year or less) and that it would replace some of MBS with T-bills, if the MBS roll-off exceeds its monthly limit of $ 20 billion. The stated purpose was to replace some of its longer-term values ​​with short-term values. Then the repos market exploded.

As part of its rescue from the repos market, the Fed announced that it would buy about $ 60 billion a month in T-bills to increase the excess reserves that banks have deposited in the Fed, under the assumption that when surplus reserves reach a certain level, the banks would lend with enthusiasm to the market of repos without setbacks. And then I would stop this $ 60 billion program a month. Since October, the Fed has bought $ 210 billion in T-bills:

Total Treasury securities dominated by T-Bills.

Given the explosion of T-Bills from almost zero to $ 210 billion in four months, total Treasury values ​​(including T-Bills) increased to $ 2.38 billion, the highest since May 2018:

The Fed throws MBS.

The Fed has made clear with numerous pronouncements in 2019 that it wants to get rid of its MBS holdings at a rate that does not exceed $ 20 billion a month (the "limit"). And it sticks to your plan.

The Fed does not actually sell its MBS. Like all MBS holders, it receives transferred capital payments as the underlying mortgages are paid or canceled. About 95% of the MBS in the Federal Reserve balance sheet expire in 10 years or more, and the current "runoff" is due almost entirely to these transferred capital payments that skyrocketed at lower interest rates during last year they triggered a wave of refis.

During the first three weekly balances in January, the net balance of MBS in the Federal Reserve balance fell by $ 10 billion to $ 1.399 billion, below where they had been for the first time in October 2013:

Total assets marked.

The fall in repositories, the increase in T bills, the slow increase in Treasury bonds, the drop in MBS and other activities reflected in the Federal Reserve balance sheet, all combined, have caused total assets to decrease at $ 30 billion over the seven-day period at $ 4.146 billion. This was reduced by $ 20 billion from the balance sheet four weeks ago, on December 25:

The various elements on the side of the Federal Reserve balance sheet assets are going in different directions: repos were contracted, T-Bills increased, Treasury bonds increased, MBS fell and, in net terms, total assets They have fallen by $ 20 billion for four weeks. .

The level of assets fluctuates from week to week, and the movement of one week does not indicate a trend.

But the comparison of the last four weeks, when total assets fell by $ 20 billion, with the previous four weeks, when total assets increased by $ 123 billion, indicates that there has been a change, and more than a nuance of change, in what the Fed has been doing after it reached the market of repos until December 31 without exploding. And that expected endless flood of new liquidity seems to have dried up to a large extent.

Here is who got what from the Fed in 2019, including dividends. Read… The Fed pays $ 35 billion to the banks, $ 6 billion to the Reverse-Repo counterparts in interest for 2019, remits $ 55 billion to the US Treasury. UU.


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