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By Wolf Richter for WOLF STREET.
Total assets on the Fed’s weekly balance sheet jumped by $272 billion in one week, to $6.08 trillion, according to the Fed’s release Thursday afternoon. Since the Fed started this spree of Wall Street and asset-holder bailout programs four weeks ago, total assets have exploded by $1.77 trillion.
But note: This increase of $272 billion is less than half of the increases in the prior two weeks. You can see this in the chart as the distance between the two markers this week shrank by half compared to the prior two weeks:
The asset side of the Fed’s balance sheet is mostly composed of Treasury securities, mortgage-backed securities (MBS), repurchase agreements (repos), “foreign central bank liquidity swaps,” and “loans.” We’ll go through them one at a time.
The Fed added $293 billion in Treasury securities during the week of the balance sheet. But the total balance sheet increased by “only” – so to speak – $272 billion. This $293 billion spike in Treasury securities this week was lower than the spikes in the prior weeks which averaged about $350 billion. This is one factor in the cut-in-half QE-4. For now, the Fed is sticking to its announcement that it would drastically cut QE from the prior weeks.
The Fed is now adding only Treasury securities with maturities of over one year (coupon Treasury securities, TIPS, and Floating Rate Notes). The balance of T-bills (non-coupon securities with maturities of one year or less) has remained roughly flat for four weeks, at $326 billion, and the Fed has only bought enough to replace T-bills that matured.
Repos on their way to irrelevance.
The Fed is offering $1 trillion per day in overnight repos plus over $1 trillion a week in term repos with various maturities reaching up to 84 days. Overnight repos unwind the next day. But term repos unwind on the maturity date, and via term repos, the market could load up on several trillion dollars in a few weeks. But that’s not happening. There are only a few nibbles every now and then.
As of today’s balance sheet, the total balance or repos outstanding has plunged by 56% from the peak on March 18, to $192 billion. Over the 7-day period, repos dropped by $70 billion, which is another factor in the shrinkage of QE-4:
Central Bank Liquidity Swaps: Biggies BOJ & ECB
As part of its bailout scheme, the Fed now operates “dollar liquidity swap lines” with the ECB, the BOJ, and the central banks of Canada, England, Australia, New Zealand, Norway, Sweden, Switzerland, Denmark, Singapore, South Korea, Brazil, and Mexico. Of note:
- The lion’s share of the outstanding balances are with the Bank of Japan ($193 billion) and the ECB ($141 billion).
- Trailing far behind is the Bank of England ($22 billion).
- There has been no activity with the central banks of Canada, Australia, Brazil, New Zealand, and Sweden.
- The remaining central banks split up the crumbs amongst each other.
The Fed’s weekly balance sheet closes Wednesday evening, at which point the total outstanding swap balances were $$358 billion, up by $9 billion from the balance sheet a week ago.
The chart below shows daily balances by country, and includes today’s balance (right column), which jumped to $397 billion:
The two central banks that use this liquidity swap line the most – the BOJ and the ECB – preside over export-focused economies that have large trade surpluses with the US and therefore obtain a constant flow of dollars from those trade surpluses with the US.
Also, their currencies are the second and third largest global reserve currencies: The dollar’s share is down to 61.8%; the euro’s share is 20.1%; and the yen’s share has risen to 5.6%. In addition, the BOJ sits on $1.2 trillion in US Treasury securities.
So the BOJ and ECB don’t need the dollars for trade. But in both Japan and the Eurozone, banks and companies have large amounts of dollar-denominated debts and speculative positions, and when they roll over, they need to be refinanced with cheap dollars at the lowest possible cost (yield). And those swap lines make that possible.
With these liquidity swaps, the Fed lends out newly created dollars and takes the other central bank’s newly created domestic currency as collateral. The exchange rate is the market rate at the time of the contract. These swaps have a fixed maturity, currently 7 days or 84 days. When the swaps mature, the Fed gets its dollars back, and the other central bank gets its own currency back. The Fed carries these swaps on its balance sheet valued in dollars at the exchange rate set in the agreement.
The line item “Loans” is a group of asset accounts that were essentially inactive after Financial Crisis 1. Over the past four weeks, they rose from near-zero to $130 billion, but since last week, the amount has been essentially unchanged. This is what the Fed has lent out as part of its new bailout liquidity programs and direct lending programs, by category:
- Primary credit: $43 billion
- Primary Dealer Credit Facility: $33 billion
- Money Market Mutual Fund Liquidity Facility: $53 billion
The chart is on the same scale as the chart for repos above, giving these loans some room to grow into:
Over the past four weeks, the Fed disclosed $428 billion in gross purchases of MBS. The MBS market was blowing up, mortgage REITS were blowing up, mortgage rates were rising under that pressure, and the Fed decided to bail everyone out rather than to let the market sort this out.
But it’s complicated. Holders of MBS, including the Fed, receive pass-through principal payments as the underlying mortgages are paid down or are paid off. Currently, there is a boom in mortgage refinancing due to the lower interest rates, and these pass-through principal payments resulting from those refis have become a tsunami for the Fed. If the Fed didn’t buy any MBS, its balance of MBS would shrink rapidly.
But over the past four weeks, the Fed bought $428 billion in MBS. Some of these purchases just filled in the holes left behind by the pass-through principal payments. The remainder increased the size of the Fed’s MBS balance.
But, but, but… MBS trades take a while to settle, and the Fed books them only after they settled. So what we’re seeing on the Fed’s balance sheet hasn’t quite caught up with reality. And what we’re seeing is that after the $73 billion spike last week, the balance of MBS has remained flat this week at $1.46 trillion:
Since March 11, the Fed created $1.77 trillion and handed it to Wall Street either as loans or to purchase financial instruments. The sole purpose of this was to inflate asset prices and bail out asset holders. It’s apparently against the law in the US for the Fed to allow the wealthy to lose their shirts, or something. The crumbs offered to small businesses or the real economy have not materialized yet. Those are future projects, if they ever materialize.
If the Fed had sent that $1.77 Trillion to the 130 million households in the US, each household would have received $13,600. But no, this was helicopter money exclusively for Wall Street and for asset holders.
Gut-wrenching. The hope is that most people will be rehired as the health crisis becomes more manageable and lockdowns are loosened. Read… Week 3 of the Collapse of the US Labor Market
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