Fed QE Amid ‘Everything Mania’: Total Assets Of $ 7.8 Trillion, More Than Doubled In 18 Months Since Repo Market Exploded
QE from crisis to crisis, and even in the absence of a crisis.
By Wolf Richter for WOLF STREET.
The Fed’s total assets over its balance sheet for the week through Wednesday, May 5, fell $ 10 billion from the previous week and $ 40 billion from the record two weeks earlier, to $ 7.77 billion. In the 14 months since the start of the crazy money printing issue, the Fed has amassed $ 3.53 trillion in assets on top of its existing mountain.
But wait … Since the repo market exploded in September 2019, this Fed may have added $ 4.0 trillion to its balance sheet, more than double in 18 months. This is how crazy those efforts have been to bail out the biggest speculators, inflate the biggest Everything Mania, and create the biggest wealth disparity America has ever seen, all in the shortest possible time:
But the Fed has let most of its bailout and liquidity programs expire, run out, or languish on ice. Some of them are now deleted. What the Fed is still buying in large quantities are Treasury securities and residential mortgage backed securities (MBS) amid this madness of everything from cryptos to housing.
Here’s the detailed view of the Fed’s total assets since early 2020. The $ 40 billion drop over the past two weeks is barely visible in the middle of the trillion pile:
Treasury securities topped $ 5 trillion.
The Fed added Treasury securities at a steady rate of around $ 80 billion per month, after its initial explosion last spring, bringing the 14-month total addition to $ 2.54 trillion, which has more that doubled its treasury holdings over the period and crossed $ 5 trillion:
Why the hell is the Fed still buying MBS?
The US real estate market is totally destabilized, and yet the Fed continues to add mortgage-backed securities to its pile, now at $ 2.2 trillion, to lower mortgage rates and drive up house prices.
The MBS balance moves in weekly zigzag. MBS holders receive pass-through principal payments as the underlying mortgages are repaid or repaid. The Fed purchases MBS from the “to be announced” (TBA) market to replace principal pass-through payments and increase its balance. But transactions in the TBA market take months to settle, and timing differences create zigzags. It’s the trend that counts.
Since July of last year, the balance has grown at a rate of about $ 27 billion per month:
$ 350 billion in “unamortized premiums”
OK, here we are descending into the link burrow. The Fed’s balance sheet shows “unamortized premiums” of $ 350 billion, which have declined in recent weeks. They track the premium over the face value the Fed paid for the securities it bought in the market. When these securities mature, the Fed receives only face value. The premium then disappears. The Fed tracks this difference separately.
Any bond investor who buys bonds in the market goes through this. In these times of low interest rates, when you buy a 10-year Treasury security that was issued a few years ago with a coupon interest payment of $ 30 per year per $ 1,000 bond (coupon of 3%), you’re going to have to pay a premium to get those $ 30 coupon interest payments. And when the bond matures, the premium is gone and you only get the face value ($ 1,000) of the bond.
The Fed tracks this separately. As these bonds mature – they are Treasury securities and MBS – the premium the Fed paid for these bonds becomes zero.
Repo agreements remain at zero:
The Fed still offers repo, but at a bid rate that is not competitive with the market, and there have been no takers since last summer, when all the repurchases matured and unwound, the Fed recovering its money and the counterparties recovering their securities. :
Central bank liquidity swaps are falling to next to nothing.
As part of this swap program, which still exists but is no longer in use, the Fed offers dollars to 14 other central banks in exchange for their currency. Almost all of these swaps, which peaked at $ 450 billion last June, have expired and been unwound:
SPV Alphabet Soup.
In the first weeks and months of this madness, the Fed created Special Purpose Vehicles (SPVs) as legal entities that can buy assets that the Fed is not allowed to buy otherwise, including corporate bonds, even junk bonds, bond ETFs, junk bond ETFs. , auto loan backed securities, municipal bonds, corporate papers, PPP loans, etc. The Fed lends to SPVs and the Treasury Department provides equity that would take the first loss.
Most of these SPVs have expired or are on ice, with balances decreasing or having already fallen to zero. The exception is the PPP liquidity facility (red), which the Fed extended until June. This SPV buys PPP loans from banks and continues to grow, now at $ 76 billion, bringing the total value of these SPVs to $ 158 billion:
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