mortgage-backed securities (MBS)

Robin Harding

The New York Fed has published the agenda and opening remarks of its annual meeting with its bond dealers for the first time. Brian Sack, manager of the System Open Market Account, ran dealers through the Fed’s recent policy moves: Read more

In June last year, the Bank of New Zealand issued the country’s first covered bond – securities backed, for example, by mortgage payments. (So the bank, receiving loan payments, in turn issues debt, receiving cash for that and allowing them to lend more.) Seven months later, the central bank has already seen fit to limit issuance of these bonds to 10 per cent of a bank’s total assets.

The practice allows a bank to increase leverage. The popularity of this and similar leveraging techniques in the US and Europe has been blamed for difficulties faced during the credit crisis. Complex interdependencies are created by reselling debt, repackaging it or simply issuing new debt on the basis of cashflow from other debt. Read more

James Politi

I was watching a segment on the Federal Reserve on CNBC television earlier today, and a couple of times the guests on the show referred to the resumption of quantitative easing as Ben Bernanke’s “bazooka”.

And that brought me way back to the summer of 2008 – when then treasury secretary Hank Paulson sought authority from Congress to bailout Fannie Mae and Freddie Mac, the huge mortgage giants, if necessary. Mr Paulson argued that if markets knew the government would rescue the companies, that would be sufficient to restore confidence, and a bail-out would not be necessary. But the opposite occurred, and little more than a month later, Fannie and Freddie were in conservatorship.

Back to Mr Bernanke. Read more

James Politi

There was about a 50-50 chance that the Federal Reserve would take the course it chose today with the decision to reinvest proceeds from expiring mortgage-backed securities – a level of uncertainty over the outcome of a Fed meeting not seen in months.

For Ben Bernanke, this probably marked his trickiest day in the office since being confirmed to a second term as chairman in January. And Mr Bernanke certainly delivered on his reputation for being an able consensus-builder. Read more

Perhaps to offset rumours of further easing, the Fed has announced further trial runs of a key tightening tool.

The New York Fed will test one of its main liquidity-draining tools by conducting a “series of small-scale, real-value reverse repurchase transactions” with primary dealers et al. This repeats and expands upon a similar set of tests announced in October and run in DecemberRead more

James Politi

Goldman Sachs economists have been among the more bearish forecasters on Wall Street, seeing an incredibly sluggish recovery with inflation falling close to zero and unemployment hovering around 10 per cent through the end of next year.

So last night, they released a 32-page paper taking their view to its most logical conclusion. If they ran the Federal Reserve, they might well be contemplating further policy accommodation. “In the short term our model combined with GS economic projections implies that further macroeconomic easing would be optimal to counter stubbornly high unemployment and falling inflation. With the funds rate already at zero bound, additional stimulus would need to come through fiscal easing and/or renewed asset purchases.”

The GS paper goes on to say, to no great surprise, that if the additional easing is carried out on the fiscal side, “it should be paired with legislation that brings the federal budget back onto a sustainable path via a combination of spending cuts and tax increases.”

Instead, if the focus is on asset purchases, GS warns that the Fed would have to be “realistic” about the outcome, since there is a potential problem of diminishing returns. Read more

James Politi

Even though many economists have pushed back their expectations of the first interest rate hike by the Federal Reserve, the debate rages on about the tools the central bank should eventually use to tighten monetary policy.

In a research paper out today, Glenn Rudebusch, senior vice-president at the San Francisco Fed, makes a compelling case for not rushing to shrink the Fed’s $2,300bn-plus balance sheet, a move that some more hawkish officials have been pushing for early in the tightening cycle in order to contain inflation.

Overall, Mr Rudebusch concludes that since many predict the US economy will take “years” to return to full employment and inflation will stay low, it will take “a significant amount of time” for the Fed to exit from its current easy money monetary policy stance.

But some of his most interesting points Read more

James Politi

Today’s Fed minutes offered some crunchy details on the debate within the US central bank over asset sales. And it looks like Ben Bernanke is winning the argument.

Months ago the Fed chairman said the central bank should consider selling the $1,000bn-plus portfolio mortgage-backed securities and agency debt accumulated during the recession, but only after the recovery was entrenched and monetary policy tightening had begun. Read more

James Politi

The 30-year fixed rate mortgage rate in the US fell this week to a five month low of 4.93 per cent, according to Freddie Mac.

Mortgage rates had spiked above 5.20 per cent early last month, just after the Federal Reserve ended its $1.250bn plan hatched during the financial crisis to purchase mortgage-backed securities and support the housing market. Read more

James Politi

Most of our interview on Saturday with James Bullard, president of the St Louis Federal Reserve Bank, was focused on his stance on the financial reform bill, which he seems quite exercised about.

But left on the cutting room floor were some of his observations on last week’s meeting of the Federal Open Market Committee, which he attended. Read more

James Politi

There was little news in today’s prepared testimony by Ben Bernanke, Federal Reserve chairman, on the exit strategy. Mr Bernanke chose not to talk about the discount rate except to say that lasts month’s increase should not be viewed as a monetary policy shift.

And he mostly went over what he had already said last month in terms of the sequencing of the tightening, with reverse repurchase agreements and term deposits ramping up before – or alongside – an increase in the interest rate on reserves. Scant if any change there.

But one shift in tone did stand out. Read more

Simone Baribeau

During part one of the House Financial Services hearing on unwinding the Fed’s emergency liquidity programmes Ben Bernanke, chairman of the Federal Reserve, was quizzed on Okun’s law, an economic model, here-to-fore confined to the vocabulary of economics geeks.

So what is happening during part two of the hearing – when a group of independent economists will be brought together. Will it be a party with a punchbowl? Will anyone be willing to take it away? Read more

Between 2010 and 2014, $1,400bn US commercial real estate loans will reach the end of their terms. Nearly half of them are currently in negative equity – that is, the borrower owes more than the property is worth. And banks are reducing the number of loans in the sector, and have been doing so throughout 2009.

More shocking is that banks and their auditors are typically well aware of the problem, but have not written down the value of property as prices have fallen. Instead they are “extending and pretending” – or “delaying and praying”: holding property values steady and assisting the borrowers where possible. They need to. If banks were accurately to record property values, they would write down assets on their own balance sheets and jeopardise their business (see example to right).

A very thorough report just released from the Congressional Oversight Panel expects many banks to go under when the pretence comes to an end. The report concludes: “There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.”

When a government body admits things are at crisis proportions, you have to take notice. This isn’t journalistic hyperbole. It is hard to overstate the impact of the coming second subprime, hitting, as it will, a very fragile economic recovery.

So, who will be most affected? In a nutshell, banks, and mostly the smaller ones. Read more

Simone Baribeau

The Federal Reserve board members have argued that asset bubbles are hard to identify when they’re growing. In retrospect, though, St. Louis Fed president James Bullard is calling a bubble a bubble.

Asked by Fox Business News about the housing market recovery, Mr Bullard made clear he wasn’t holding his breath waiting for the market to pick back up.

We have too many houses, so I wouldn’t expect that to really boom on us.

Housing prices have “by and large” stabilised, he said. And even there, he hedged. Read more

Hungarians will be borrowing more forints and less euros under one of several new initiatives planned by the country’s central bank.

Interest rates are typically higher on forint-denominated mortgages than, for instance, their euro counterparts. But spreads have been narrowing and the central bank plans to reduce them further. The Magyar Nemzeti Bank will buy forint-denominated mortgage notes up to a maximum face value of 100bn forint ($500m). Read more

Toxic assets will be sold with a AAA guarantee from the US government under one of the options put forward by the Federal Deposit Insurance Company.

The FDIC has more than $36bn in toxic assets on its books, ready to sell. And apparently the corporation is seeking a decent return. Scared?

There appear to be two main differences between this plan and the one that nearly brought down capitalism: first, it’s the US government issuing the guarantee and not some special legal entity that can conveniently go bankrupt. Phew. Oh no, hang on. The second difference is that we know most of these assets are toxic, or worth less than initially thought. At least the first time round, they were bought in good faith. Read more

Krishna Guha

Fed minutes show doves are still worried about the sustainability of the recovery. They fear renewed weakness in housing as the central bank winds down its MBS purchases and want to keep open the option of buying more MBS if a) the economic outlook deteriorates b) mortgage rates spike.

That option is still open, but I suspect it would take a big forecast downgrade and/or a large mortgage rate spike to persuade the majority of the committee to buy more MBS. Read more

What connects computer screens, green cars and military power? Rare earth elements, required for the manufacture of many advanced technologies, from hybrid cars to guided missiles. China enjoys 98 per cent of REE production, cornering the market after a single US mine was closed in the mid 1980s. Chinese companies have bought stakes in Australian and Canadian rare earths prospects and have tried unsuccessfully to buy the still idle US facility.

The debt load of Eastern Europe is apparently putting off investors. But there is worse news for rich countries: investors are betting that rich countries will default on their bonds Read more

As the IMF joins calls for a stronger yuan, a Xinhua report on Saturday said the Chinese government would not allow the renminbi to appreciate against the dollar in the short term. Just hours before Obama was due to arrive in China, the authorities there warned that the Fed is fuelling speculative investments and endangering the global recovery through loose monetary policy. Read more

Krishna Guha

The Fed also shaved $25bn off its planned agency debt purchases, writes Krishna Guha of the Financial Times Read more