From FT Alphaville, September 12:
Will the Fed really sell its mortgage bonds next year?Predictability and principles should win
Ajay Rajadhyaksha is global chair of research at Barclays.All eyes have been on the Federal Reserve this year, with the US central bank in the midst of its most aggressive hiking cycle in decades. September is no exception.Will the Fed hike 75 basis points this meeting? How high will the fed funds rate ultimately go? Will cuts start next year, as markets are pricing? Every conversation I have had with investors includes some version of these questions.In contrast, little attention has been paid to the Fed’s other tightening tool — the QT (quantitative tightening) program to reduce the size of the balance sheet.To some extent, this is understandable. After all, there hasn’t been much in the way of QT yet; the last three months have seen the securities portfolio drop from $8.5tn by less than a hundred billion dollars. In the real world, that is of course an unthinkable amount of money. But it isn’t much of a dent in the Fed’s holdings, despite three months of QT.
Moreover, Fed officials have previously played down the impact of balance sheet reduction; Treasury secretary Yellen (when she was Fed chair) once said that quantitative tightening was like “watching paint dry”. And perhaps most importantly, the Fed has never sold securities outright. Instead, as the Treasuries and mortgage-backed securities (MBS) it owns mature, the bank has simply not reinvested the proceeds, allowing its balance sheet to fall.This cycle may be different. And possibly sooner than investors expect....
For the week ended August 17 the balance sheet showed a decline of $29.376 billion which would be great, except:
As seen in table 5, the second-largest asset decrease was the $15.606 billion reduction in other assets (accrued interest due the Fed and other receivables....
Regarding "In contrast, little attention has been paid to the Fed’s other tightening tool — the QT...", Previously:
"The Fed’s QT Isn’t Going to Plan"Latest Federal Reserve's Balance Sheet: Once Again The Mortgage Backed Securities Portfolio Increased
The Mortgage Backed Securities Trap The Federal Reserve Set For Itself, In One Chart
Former Philadelphia Fed President Charles Plosser: "Why The Fed Should Only Own Treasuries"
Former Philadelphia Fed Head Plosser On The Federal Reserve Balance Sheet With Comments On the Mortgage Backed Securities Portfolio
Ahead of Tomorrow's Personal Consumption Expenditures Inflation Report, A Reminder
Dylan Grice: "Crash, Then Boom"
Fed Purchases Of Mortgage Backed Securities Have Destroyed The Housing Market
Followup: Despite What The Federal Reserve Says, Financial Conditions Are Loosening, Not Tightening
"The Fed Is About to Ramp Up Balance-Sheet Shrinkage. It May Get Dicey"
Sometimes I wonder if the Fed spent the last three months of "QT"* just waiting for the big banks to get their derivative books in order before doing a rugpull on real estate....
In Case You Missed It: "Blackstone Puts Finishing Touches on Record Real-Estate Vehicle" (BX)
Opportunistic, thy name is Blackstone....
Atlanta Fed Head Raphael Bostic On Mortgage Backed Securities: "We are going to have to actively try to sell them."Got it? Pull back from the market which a) avoids top-ticking and b) accelerates the downward trend already in place.
Wait.
Deploy cash offers when retail buyers have to contend with comparatively sky-high mortgage rates.
