Details on Fed Balance Sheet Reduction

2018-01-02T18:42:08+00:00 June 15th, 2017|Categories: Uncategorized|Tags: , , , , , |

After its meeting concluded on June 14th, the Fed provided some details about the plan to reduce its holdings of U.S. Treasuries and agency debt and mortgage-backed securities (MBS). Regarding the starting time for the reductions, Fed Chair Yellen said that they could begin “relatively soon if the economy performs in line with the Fed’s forecasts. This comment caused investors to anticipate that the starting time will be in September or October, which was sooner than expected. In a document called the Policy Normalization Principle and Plans, the Fed laid out additional information. They will reduce their holdings by not reinvesting all the principle payments received. Over the last few years, they have held the level of their holdings steady by reinvesting all the principle payments received. The amount of principle payment received that will not be reinvested will start at $10 billion per month and will grow by $10 billion every three months until the monthly total reaches $50 billion. The reduction then will be capped at $50 billion and will continue until the size of the Fed’s holdings has fallen to the desired level. The Fed did not disclose the desired level but did say they expect the [...]

Fed’s Plan for Balance Sheet

2018-01-02T18:46:34+00:00 May 25th, 2017|Categories: Uncategorized|Tags: , , , , , , , |

During the quantitative easing years of 2008 through 2014, the Fed acquired trillions of dollars of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities (Agency MBS) and U.S. Treasuries. Its balance sheet grew from under $1 trillion to over $4 trillion. The Fed stopped adding to its holdings a few years ago, but has maintained a policy to reinvest principle payments received, thus maintaining a steady level of investments. At times over the last few years when refinance activity was high and the Fed was reinvesting the principle payments it received, the Fed was the buyer of the vast majority of all newly issued Agency MBS. Even recently, the Fed has been the buyer of approximately 25% of newly issued Agency MBS. The demand from the Fed for Agency MBS has had a positive effect on mortgage rates. For the past few months, Fed speakers have been saying that the time to begin “normalizing their holdings was near. But few details were provided.  The minutes of the Fed’s May 3nd meeting, released on May 24th, provided some details about their plan. Although many details remain unknown. The plan calls for the Fed to tell investors the maximum amount it [...]

French Presidential Election

2017-12-20T17:34:11+00:00 April 20th, 2017|Categories: Uncategorized|Tags: , , , , , |

The first round of the French Presidential election will take place on Sunday. It is significant for global markets because of its potential implications for the future of the European Union (EU). The two candidates who receive the most votes on Sunday will proceed to the second round of voting on May 7, and the latest polls show that the top four candidates are very close. Two of these four (Le Pen and Melenchon) favor exiting the EU. The possibility that an anti-EU candidate could win has caused investors to shift to safer assets, which has helped mortgage rates in recent weeks. A strong showing by the anti-EU candidates would be good for mortgage rates, as investors likely will shift additional funds into safer assets. If they do poorly, it is expected that investors would shift back into riskier assets, which would be negative for rates.

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