PrefBlog

The Fed continued its process of reintermediation today – this time purchasing Agency direct and mortgage-backed debt:

Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Purchases of up to $100 billion in GSE direct obligations under the program will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions and will begin next week. Purchases of up to $500 billion in MBS will be conducted by asset managers selected via a competitive process with a goal of beginning these purchases before year-end. Purchases of both direct obligations and MBS are expected to take place over several quarters.

Assiduous readers will recall that on November 21 I reported a big move by the Chinese out of agencies and into Treasuries … now the Fed’s going to take the other side of that trade. Spreads narrowed considerably:

The yield premium, or spread, on the so-called current coupon 30-year fixed-rate mortgage securities guaranteed by Fannie Mae, over the benchmark U.S. 10-year note narrowed to 175 basis points, from 209 yesterday, data compiled by Bloomberg show.

That’s not all! The Fed will also be financing Asset Backed paper:

Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department–under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008–will provide $20 billion of credit protection to the FRBNY in connection with the TALF. The attached terms and conditions document describes the basic terms and operational details of the facility. The terms and conditions are subject to change based on discussions with market participants in the coming weeks.

New issuance of ABS declined precipitously in September and came to a halt in October. At the same time, interest rate spreads on AAA-rated tranches of ABS soared to levels well outside the range of historical experience, reflecting unusually high risk premiums. The ABS markets historically have funded a substantial share of consumer credit and SBA-guaranteed small business loans. Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.

I have no idea of what the office politics behind these two moves might have been … but it is easy to speculate that one’s ideas are taken a lot more seriously when one is the Treasury Secretary Designate!

Sorry, folks! Not only is this late, but there’s only the index table done! I have rather a lot going on…

This entry was posted on Wednesday, November 26th, 2008 at 12:34 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.