"Oh my … " – blogger Calculated Risk (Dec 3, 2008)
Careful where you’re pointing that thing, Neel!
OK, so the gang that couldn’t (heretofore) shoot straight has just brought out a shiny new shootin’ iron with increased firepower. Treasury’s spinning the cylinder in preparation for firing off a few more hundreds of billions of dollars at high mortgage rates. They’re taking dead aim to rotate that pesky 30-year fixed down to 4.5.
Meanwhile, back at the Agency Debt Ranch, I see our old friends the bond-holding foreign central banks have just been tied to the railroad tracks. There’s now a train bearing down on them and its name is Prepayment Risk: "… on a mortgage-backed security, the higher the interest rate relative to current interest rates, the higher the probability that the underlying mortgages will be refinanced."
Yep, looks like we might have to organize a posse to rescue the MBS bondholders from the consequences of this phase of the housing bailout. Some time after CR’s brief expression of concern (noted above), Inman weighed in with a more extensive piece.
News that the Treasury Department may use Fannie Mae and Freddie Mac’s influence on mortgage markets to push interest rates on home loans down to 4.5 percent has raised hopes for a boost in home sales but sparked debate on whether it’s wise to prop up housing prices.
The Wall Street Journal reports that the Treasury is considering using Fannie, Freddie and other government-sponsored entities to purchase securities backed by mortgages at a price equivalent to a rate of 4.5 percent.
Treasury officials have not commented, but the Federal Reserve announced a similar program on Nov. 25, saying it would spend $600 billion to buy mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae.
This has been extensively covered elsewhere in blogs and the MSM, so let’s cut to the chase. Reuters quietly reported this week  that foreign central banks were net sellers of Agency Debt for a ninth straight week. The amount moderated significantly, though, falling to $5.37 billion from last week’s significant $13.29 billion. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site. Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.
Doom will be watching this next chart carefully over the next while to see if the cenbanks take comfort from all the government’s support of agencies in spite of these new pressures coming out of the effort to force mortgage rates down.
The cenbank buy of treasuries rose a bit to $7.34 billion from last week’s $5.81 billion. This resulted in a modest net buy of US obligations by the cenbanks of $1.97 billion after last week’s big net sell-off. Cenbanks have been net buyers of treasuries now for 13 straight weeks.
… but when all is said and done, the main move this week was once again a transfer of the foreign central bank’s obligations from agencies into treasuries. Twist’s ratio graphs continue their steady downward trend.
Notes and References: "WSJ: Treasury Considers Plan to Lower Mortage Rates to 4.5%", CalculatedRisk, December 3, 2008. : "Treasury eyeing 4.5% mortgages? Economists question propping up home prices", by Matt Carter, Inman, December 4, 2009. : "Foreign central banks’ U.S. debt holdings rise – Fed", by Chris Reese, Reuters, December 4, 2008. : "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York. : The updated data set as a Comma Separated Value (CSV) file is here.