As I am writing, this article [1] is the #1 story on Time Magazine’s web site. Close readers of Doom’s sidebar may have seen earlier stories involving FTN’s Jim Vogel. He has been analysing the impact of Paulson’s bailout on mortgage finance. To put the situation simply, Paulson has blessed many additional American financial institutions with de facto GSE status, diluting the financing advantage traditionally enjoyed by the real GSEs like Fannie and Freddie. Here’s some of what Time was saying Wednesday. (oops! that’s John Vogel in Time — wonder if it’s a relation?)

The government’s effort to boost bank lending to end the credit crisis is hurting one of the areas critical to the nation’s recovery: mortgage rates. … Some economists say mortgage rates could soon top 7%, a level they have not seen in more than six years.

"Certainly the moves the administration have made so far are not directly attacking the financial issues that affect American homeowners," says John Vogel, a finance professor at Dartmouth’s Tuck School of Business. "We need to refinance million of homeowners into affordable mortgages, and if rates go up that makes that job just much harder to do."
…
The problem is that other moves the government has made to render bank debt safer has had the unintended consequence of making Fannie and Freddie’s bonds less safe by comparison. So Fannie and Freddie’s investors have to be compensated for the increased risk. In particular, traders say, the move in the past week by the Federal Deposit Insurance Corp. to temporary offer unlimited deposit insurance for non-interest bearing accounts and guarantee roughly $1.4 trillion in new unsecured bank debt has caused a rush of selling of the bonds of Fannie and Freddie. That’s because the FDIC’s move makes bank debt more attractive at a time when traders are looking for safety. …

Lower prices (and thus higher interest rates) for Fannie and Freddie bonds make it more expensive for the government mortgage guarantors to borrow, and that means that Fannie and Freddie have less money to purchase home loans. Which means a lower supply of capital available for mortgage issuers. …

 

When Twist redid the graphs her eyes popped at the new raw numbers graph. The repulsion effect is getting even more dramatic, and we’ve decided to promote this one to the top of our weekly summary.

UPDATE: Seems like we’re not the only ones playing around with this data set.  Over at the Council on Foreign Relations, Brad Setser has an important analysis [5] of these trends.  This is an interesting way to approach the set.  Starting one year after the start of the set on Feb 7, 2000, they record the change over the last year.  If the blue line hits zero, it means the central banks will have sold off their previous year’s worth of buys.  In fact they have already done so for their previous 6 months’ worth.

So this week could mark when the central bank buying trends we’ve been following become mainstream news. In any case, big-time agency debt holders like PIMCO’s Bill Gross must be following this situation with concern. In this week’s Reuters report,[2] we find that foreign central banks have extended into a second week their historic conversion of agency debt into "ultra-safe" treasuries. This news comes from FRBNY’s weekly statistical release H.4.1 [3] and Doom has again added the last week’s data to our CSV file going back to early 2000.[4] The Reuters story succinctly summarized why real GSE debt is losing its customary advantage.

The U.S. government’s plan to guarantee short-term bonds issued by banks put them on a similiar footing from a credit standpoint when compared with those securities issued by from Fannie Mae, Freddie Mac and the Federal Home Loan Bank System.

 

This week’s agencies sell-off of $18.64 billion was significantly less than the week before, but that figure was still good enough for #2 status in our Top 10 List of all time Agencies moves, buy or sell. With the two week purge of around $43 billion, central banks have reversed their earlier buys going back almost six months.

Cenbanks bought a whopping $16.91 in treasuries, not quite good enough for Doom’s Top 10, and not quite enough to offset the agency debt selloff, so that total cenbank holdings were reduced by a modest $1.73 billion. Remember that last week treasury debt buys nearly exactly balanced agency debt selling.

Foreign cenbanks continue to gorge on America’s sovereign debt.

Doom’s ratio graph is beginning to look like the Olympic 10m platform dive.

The version starting at Feb 2000 continues its distinct hockey stick progress.

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Notes and References

[1]: "The Bank Bailout’s Side Effect: Rising Mortgage Costs", by Stephen Gandel, Time, October 16, 2008.

[2]: "Foreign central banks’ agency holdings tumble – Fed", Reuters, October 16, 2008.

[3]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[4]: The updated data set as a Comma Separated Value (CSV) file is here.

[5]: "Foreign central banks seek safety; the Fed, by contrast …", by Brad Setser, Council on Foreign Relations, October 16, 2008.

Stunning? Yes. Stabilizing? Not really. There isn’t a shortage of demand for Treasuries right now. But there is a shortage of willing lenders of dollars to European banks and — to a degree, [a] shortage of buyers for the debt issued by the US Agencies (Freddie, Fannie and the like). And remember that the Agencies are the main current source of credit for American households looking to buy a home — without their lending, home prices would fall much much further. …
…

The scale of the expansion of the Fed’s balance sheet is equally stunning. The Fed is currently provided at least $950b in dollar liquidity to the US financial system through various term facilities and its direct lending, and another $450b of dollar liquidity to European central banks — liquidity that is then lent to European financial institutions that are facing a shortage of dollars. Let there be no doubt that this is a systemic crisis.