Economic News

Fed’s Asset Fall by $16 Billion, -$220 Billion Since June 10: Week 7 of Balance Sheet Shrinkage

US Fed Balance sheet 2020 07 30 total 2020

Repos are gone. Dollar liquidity swaps dropped further. SPVs fell to lowest since June 17. MBS dropped by $37 billion. Treasuries rose.

By Wolf Richter for WOLF STREET.

Week seven since peak balance sheet: Total assets on the Fed’s balance sheet for the week ended July 29, released this afternoon, fell by $16 billion from the prior week, to $6.95 trillion. Since June 10, when they’d hit $7.17 trillion, they have declined by $220 billion:

Repos are gone, week 4.

After the Fed made repurchase agreements less attractive in mid-June by raising the bid rate, they fell out of use, though the Fed is still offering them:

Central-bank liquidity-swaps dropped by $5 billion.

The Fed’s “dollar liquidity swap lines” – which provided other central banks with dollars during the crisis – are falling out of use, though the program itself has been extended, just in case. This was the seventh week in a row of declines, now down to $117 billion:

SPVs & Loans fell by $3 billion, to lowest level since June 17.

Special Purpose Vehicles (SPVs) are LLCs that the Fed created and that it lends to. The US Treasury Department provides equity capital to the SPVs. The SPV then buys assets or lends.

  • PDCF: Primary Dealer Credit Facility
  • MMLF: Money Market Mutual Fund Liquidity Facility
  • PPPLF: Paycheck Protection Program Liquidity Facility
  • CPFF: Commercial Paper Funding Facility
  • CCF: Corporate Credit Facilities: includes the SMCCF (Secondary Market Corporate Credit Credit) and PMCCF (Primary Market Corporate Credit Facility). Buys corporate bonds, bond ETFs, and corporate loans.
  • MSLP: Main Street Lending Program
  • MLF: Municipal Liquidity Facility
  • TALF: Term Asset-Backed Securities Loan Facility

In addition, there is Primary Credit (“Pr. Cr.” in the chart), which are loans the Fed makes directly to banks.

The balance of these entities combined dropped by $3 billion from the prior week to $208 billion, the lowest since June 17. But note how the composition has changed: The original three entities are being phased out, as new ones have been added. The PPP loan facility is by far the biggest ($71 billion):

MBS fell by $37 billion, to $1.93 trillion.

Mortgage-backed security balances are erratic on the Fed’s balance sheet, for two reasons:

Pass-through principal payments, which are triggered when mortgages get paid down or get paid off, have turned into a torrent during the current mortgage refi boom. They reduce the balance of MBS on the Fed’s balance sheet, and the Fed has to buy large amounts of MBS just to keep the balance level.

MBS trades, which take 1-3 months to settle, are booked on the Fed balance sheet only after they settle. The timing between unpredictable pass-through principal payments and the settlement of MBS purchases is wildly different. Hence the jagged chart.

The change in MBS balance today (-$37 billion) reflects purchases from 1-3 months ago that settled during the week, minus current passthrough principal payments:

Commercial mortgage-backed securities (CMBS) are included in the balance of MBS – one of the bailout programs the Fed kicked off in March. These are “Agency CMBS” – secured by apartment-building mortgages that are fully guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae – are a relatively small portion of the CMBS universe.

CMBS secured by retail and hotel mortgages have come under severe strain, with default rates that have spiked to 18% and 24%. But the Fed’s purchases of Agency CMBS are in the still relatively sanguine category of apartment properties. And they are guaranteed by the government.

The program was launched with huge fanfare, but after a few weeks of buying, the Fed’s purchases petered out, and the balance has been essentially flat since June 10, and at around $9 billion, it remains small by Fed standards. Unlike residential MBS, CMBS purchases settle quickly:

Treasury securities rose by $34 billion.

After having ticked up last week at the smallest rate all year (+$6 billion), the balance of Treasury securities this week rose by $34 billion, to $4.29 Trillion. The varying levels of increases in recent weeks and before March are related to the twice-a-month dates when maturing Treasury securities are redeemed, and when the Fed books those redemptions (Fed gets its money back from the government).

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