Federal Home Loan Banks May Buy $150 Billion of Bonds (Update1)
By Dawn Kopecki and Jody ShennMarch 24 (Bloomberg) — Federal Home Loan Banks were freed to increase their purchase of mortgage-backed bonds by about $150 billion as part of a government effort to pump money back into a market that slumped as the housing crisis deepened.
Directors of the Federal Housing Finance Board, the banks’ regulator, approved the temporary increase today, according to an e-mailed statement. The purchases will be restricted to securities guaranteed by Fannie Mae and Freddie Mac, the board said.
“It’s an opportunity for the Federal Home Loan Banks to supply more liquidity to the secondary markets,” said John von Seggern, president of the Council of Federal Home Loan Banks which represents the banks. “I think that’s a good thing and the market needs to get that liquidity as soon as possible.”
The approval for Federal Home Loan Banks to increase their purchases comes a week after Fannie Mae and Freddie Mac, the two government-chartered mortgage-finance companies, were cleared to buy at least $200 billion of mortgage securities.
The FHLBs are cooperatives created by President Herbert Hoover in 1932 to spur mortgage lending. The system’s 8,100 owners and customers range from New York-based Citigroup Inc., the largest U.S. bank, to the single-branch Custer Federal Savings & Loan in Broken Bow, Nebraska. Their government ties support top AAA ratings from Standard & Poor’s and Moody’s Investors Service.
Record Spreads
The government increased the limit on the 12 FHLBs’ investments to 6 times capital for two years, up from 3 times, the statement said. The statement said that would increase the banks’ spending by “well in excess” of $100 billion. Based on the banks’ capital of $54 billion, the change may increase the FHLB’s purchasing power by about $150 billion.
The increase failed to spur a rally in debt backed the agencies. About $4.5 trillion of mortgage securities backed by Fannie Mae, Freddie Mac or smaller federal agency Ginnie Mae are outstanding, according to Federal Reserve data.
The difference in yields on the Bloomberg index for Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened by about 5 basis points to 182 basis points. The spread reached a 22-year high of 237 three weeks ago.
The spread helps determine the interest rate on new prime home mortgages of $417,000 or less. A basis point is 0.01 percentage points.
To the longtime loyalists of this blog, the FHLB story is an ancient one, pre-dating even the FT’s cursory coverage of this backstop behemoth by two weeks.
In other news, two impressive graphs illustrate the relative enormity of what Bernanke is doing. (A hat tip to a worthy Frenchman for these… ):
I think this has $ run written all over it, but I don’t think it will happen for another 6-12 months.
We may see 2-stage breakdown in markets – one in the next few weeks/2 months. Most participants will see this as a bear market correction. All clear will be sounded and buying back again. Unfortunately, we may see major failures over the next 6-12 months resulting in a spectacular crash. That would be accompanied by a run on $, and will serve as the top for the next 8-10 years.
How does my thinking connect to your article above? Simply that TAFs, FHLB purchases etc. will hoodwinks bulls that the Fed will save the day and any market correction will be construed as buying opportunity. Its only when the Fed runs out of options, that the real market correction will happen (6-12 months). And that’s what makes me believe that commodity and Precious Metals have undergone only technical correction. They will continue their ascend (implying inflationary recession) till we see a spectacular crash, at which point we’ll start deflationary recession.
Any thoughts?
Shankar,
I agree that gold has experienced a fairly substantial technical correction, not a fundamental break.
I don’t bet on mega-crashes because, as blatant as the Fed’s attempts have been, every other government has similar problems. I think the euro is still in more danger than the USD, for example.
I think precious metals and second-tier, fiscally sound currencies, especially NZD, AUD and CAD, will gain significantly as the euro and the dollar are further reflated. That’s my “secular” market prediction.
Actually, you make very good point w.r.t. currencies (in addition to precious metals).
It won’t be a bad idea to diversify (actual savings) into these currencies. I think you are right on the mark about the secular (up) market prediction. And it could be both – dollar depreciation and commodities appreciation (hence appreciation of these currencies).
Thanks.
Shankar, apparently a link you posted in a comments section of a technical-trader website (“slope of hope”?) got me about 100 hits in the past 48 hours?
Thanks ;-)
Ha, ha. Thanks. I try to do my best. ;-)
Just joking. But I do like your blog and your arguments/analysis makes sense.
Shankar