Fed Will Purchase $4.65 Billion 3-7 Year Treasury Coupons Next Week (These Rates Were Made For Dropping)

These rates were made for dropping.

(Bloomberg Intelligence) — The New York Federal Reserve will purchase T-bills twice next week. Besides bills, it will buy the 3-4.5 year and 4.5-7 year coupons using MBS runoff proceeds. In this note, we look at the bonds the Fed is unlikely to purchase, given its self-imposed buying criteria; for T-bills, the Fed avoids those with four weeks or less to maturity. 

The Fed has several criteria for adding bonds to its portfolio. The trading desk will limit System Open Market Account (SOMA) holdings to a maximum of 70% of the total outstanding amount of any security. It also won’t purchase securities trading special in the repo market for specific collateral, newly issued nominal-coupon securities and those that are cheapest to deliver into an active Treasury futures contract. Exclusions also include securities that mature in four weeks or less.

The exhibit shows bonds the Fed likely won’t purchase, based on these conditions.

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Here is a snapshot of the 3-7-year sector of Treasury coupons outstanding and their spread relative to a theoretical relative-value spline curve. The Fed will look to purchase securities that are cheap to its own relative-value model.

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The US Treasury curve slope (10Y-3M) has creeped into positive territory.

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And mortgage rates continue to rise again.

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Yes, these rates were made for droppin’. And that’s just what they’ll do.

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US Cash Out Mortgage Refinancings Near Housing Bubble Highs Of 2005/2006 As Foreign Homebuyers Pull Out

What happens when home prices soar? We get boatloads of cash out refinancings where homeowners extract accumulated equity in their homes (to pay for things like vacations, college tuition for children, ventures like WUPHF, etc.)

Cash out refinancings, of course, lower the equity cushion that helps reduce default risk. And the US housing market is back near housing bubble highs of 2005 and 2006 (red line).

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Will housing continue its meteoric rise (orange line)? Not if foreign homebuyers continue to retreat.

Recently, the National Association of Realtors reported that home buying in the US by non-resident foreign investors over the two-year period through March 2019 collapsed by 56%. It wasn’t just Chinese investors. It was foreign investors from all major countries, including from Canada and Mexico, that radically slashed their home buying in the US.

I wonder if Jerome Powell and other Fed types will discuss this at the KC Fed’s Jackson Hole annual conference?

Probably the same probability as seeing jackalopes in Jackson Hole.

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