Macro effect of government MBS purchases


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The fed buying mortgages at, say, 5% and paying nothing on the balances it credits to pay for the purchases increases fed ‘earnings’/decreases private sector earnings,

So at the ‘income level’ it’s a tax that reduces aggregate demand.

Only to the extent private sector debt increases more than that due to lower interest rates is the macro outcome positive.


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Re: Agency details


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(an email exchange)

>   
>   On Sun, Sep 7, 2008 at 8:33 PM, Mike wrote:
>   
>   
>   In exchange the Treasury receives a quarterly fee, dividend payments and
>   ”warrants representing an ownership stake of 79.9% in each GSE going
>   forward.”
>   
>   Support of Agency MBS market: The Treasury will set up an investment fund
>   to “purchase Government Sponsored Enterprise (GSE) mortgage-backed
>   securities (MBS) in the open market.” The scale of this program is yet to be
>   determined. The Treasury noted that it “is committed to investing in agency
>   MBS with the size and timing subject to the discretion of the Treasury
>   Secretary. The scale of the program will be based on developments in the
>   capital markets and housing markets.” This should eliminate the majority of
>   investor concerns about the functioning of this market, improve liquidity and
>   lower borrowing costs.
>   
>   Credit facility: The Treasury has agreed to create a back-stop short-term
>   lending facility for the Agencies. In light of the other programs being put into
>   place, this seems unlikely to be utilized, in our view.
>   

Shareholders give up 79.9% of their residual value as the agencies wind down.

Must have been some technical reason the government used that % and left the shareholders just north or 20%.


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Agency take over


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Recap:

  1. If I’m reading it right, the agencies will fund directly through the Treasury. I’ve been suggesting this for many years. This lowers the cost of funds for housing, the point of the entire program, by removing a premium that’s been paid by the lack of an explicit guarantee.
  1. Agency portfolios being phased out, to be replaced by direct purchasing of the MBS (mortgage-backed securities) by the Treasury. This has no real implications for the non government sectors, just accounting on ‘their’ side of the ledger. But it does mean lending can continue and funds will be available for all eligible borrowers.
  1. Some kind of government preferred stock coming between profits and the remaining shareholders of various classes. This should leave stocks with some value depending on actual portfolio losses, unless I’m missing something.

 
I’d guess most markets have been pricing in worse outcomes than this.


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AGY MBS UPDATE: 08/12/08


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On Tue, Aug 12, 2008 at 5:18 PM, Andrew wrote:

AGY MBS UPDATE: 08/12/08

General Themes:

  • Mortgages were weaker to dealer hedge ratios – versus CXLs they were down only -5cents
  • The small CXL daily price change masks what was a pretty bad performance for mortgages
  • Dealer OAS’s are back to the wides of last week – Lehman has FN5.5 LOAS at +90bps
  • What could help mortgages?
  • Asian buying returning
  • Capital raising by the GSE’s, (or capital injection by Tsy)
  • Reduced capital surplus guidelines from OFHEO
  • Convexity led rally in rates

not to mention investors recognizing value vs tsy’s, atraight agency paper, quality AAA corporates, libor, and other lower yielding paper


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MBS Repo Markets

Thanks Pat, good report.

Yes, the Fed knows the assets won’t go away, and all they want is to see funding spreads narrow to help insure the banks aren’t forced to sell due to funding issues and thereby distort prices beyond prudent repricing of risk.


TAF auction (20bb) results announcement will come out tomorrow Wednesday 12/19 at 10:30am. Results of the program have had limited impact on repo rates but have reduced Libor rates by 20bps.Turn levels from Bank of America

UST GC= 2.80 / 2.40

AGCY MBS = 5.15

The problem with funding balance sheets hasn’t disappeared. The TAF and The Treasuries TTL programs have simply reduced the cost of funding but have not, and cannot, make an impact on balance sheet size or composition problems. Balance sheets are bloated with ABCP/ CLO / CDO / Enhanced Cash / Structured ABS / etc….

A quick survey of 4 dealers illustrates how balance sheet pressures and the liquidity of balance sheets have affected the bid for repo collateral. Usually dealers across the maturities dealers are within 5bps of each other. Currently the dispersion of bids is very wide.

At the same time we are finding dealers with balance sheet to lend. It’s just the prices of cash vary by dealer and by term and depend on which banks have bought term liquidity and what term they bought it for.

  1w 1m 3m 6m 9m 1y
MS 4.50 4.75 4.55 4.36   4.15
Citi 4.65 5.20 5.05 4.95 4.70 4.55
CSFB 4.45 4.90 4.80 4.70 4.60  
BoA 4.80 5.10 4.65 4.40 4.30 4.20
Ave 4.60 4.99 4.76 4.60 4.53 4.30
Range 0.35 0.45 0.50 0.59 0.40 0.40

The MBS spreads to LIBOR has narrowed as well. Agcy MBS had been trading as much as L-50 for 3m and longer terms. Now we are close to L-20. This seems to be a result of the TAF and CBK liquidity programs providing cheaper funds along the curve and reflects a relative downward move in LIBOR rates as the MBS and OIS markets are essentially unchanged from a week ago.


GC Tsy changes post announcment

I’m mainly interested in LIBOR over the turn as an indicator or how the new international facility is doing.

Also watching to see when higher oil means higher inflation and higher rates, vs. higher oil currently meaning econ weakness and lower rates. Maybe next week after this weeks inflation numbers are out.

GC has lost some of it’s flight to quality bid on term repos. The market is higher across terms as a result of the treasury announcement. Expectations of future rate cuts have not been priced out of the market I will follow up shortly with an AGCY and MBS runs.

GC TSY Last Night Now Change
O/N 4.60 4.23 -0.37
1wk 4.12 4.12 0
2wk 4.03 3.95 -0.08
3wk 3.7 3.75 0.05
1mo 3.7 3.76 0.06
2mo 3.68 3.74 0.06
3mo 3.63 3.71 0.08
6mo 3.62 3.67 0.05
9mo 3.52 3.56 0.04
1yr 3.42 3.46 0.04

* 1wk – 2wk seasonal add need “window dressing” balance sheets


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