unwinding the $4.5 trillion in bonds on its balance sheet this year

Thrugelmir

Two years ahead of the UK on the curve of recovery from the GFC.

Federal Reserve officials said the shedding of the $4.5 trillion in bonds the central bank is holding on its balance sheet will begin this year.

The revelation came Wednesday from a summary of the Federal Open Market Committee meeting held in March, during which the group approved a quarter-point hike in its benchmark interest rate target. Officials at the meeting noted that the Fed likely is on a faster pace with rate hikes ahead.

Unwinding the balance sheet is significant both because of its sheer size and the impact it could have on markets, as Fed members including Chair Janet Yellen have indicated that the move itself would amount to a rate hike.

http://www.cnbc.com/2017/04/05/fed-set-to-unwind-balance-sheet-this-year.html

Windofchange

Just raise the rents to cover the extra interest innit.

Thrugelmir

Windofchange wrote: »

Just raise the rents to cover the extra interest innit.

Not much of a business model. Why wait? Might as well make hay while the sun shines.

michaels

Thrugelmir wrote: »

Two years ahead of the UK on the curve of recovery from the GFC.



http://www.cnbc.com/2017/04/05/fed-set-to-unwind-balance-sheet-this-year.html

Doesn't it unwind automatically as the bonds expire if they are not being replaced?

martinsurrey

michaels wrote: »

Doesn't it unwind automatically as the bonds expire if they are not being replaced?

some will be 10/20/30 year + bonds, I don't think they want to be in the market for that long.

davomcdave

michaels wrote: »

Doesn't it unwind automatically as the bonds expire if they are not being replaced?

As the bonds become due the US Government repays the debt by selling new bonds to cover the money owed. The Fed buys new bonds to replace the ones that mature.

The Fed isn't Government owned but the profit it makes is transferred to the US Treasury so most of the coupons are effectively being paid to the Government by the Government.

Thrugelmir

davomcdave wrote: »

As the bonds become due the US Government repays the debt by selling new bonds to cover the money owed. The Fed buys new bonds to replace the ones that mature.

The Fed isn't Government owned but the profit it makes is transferred to the US Treasury so most of the coupons are effectively being paid to the Government by the Government.

The Fed moved their attention to long dated Mortgage Backed Securities. Billions of dollars worth. When they sell it will shift the market. As the Fed is the largest single holder.

Funding of the mortgage market is different in the US to that of the UK.

davomcdave

Thrugelmir wrote: »

The Fed moved their attention to long dated Mortgage Backed Securities. Billions of dollars worth. When they sell it will shift the market. As the Fed is the largest single holder.

Funding of the mortgage market is different in the US to that of the UK.

Yes it is completely different due to the impact of Fannie Mae and Freddie Mac.

According to the Federal Reserve Bank of St Louis, one of the twelve Federal Reserve Banks in the US, the Fed holds $1.77tn of MBS, the vast majority of which has over 10 years until maturity:

https://fred.stlouisfed.org/release/tables?rid=20&eid=4422

Unwinding the circa $2.5tn of treasuries into a very liquid market is definitely doable if the yield is right. Selling the MBS I think will be a harder ask. Firstly the market for MBS is a lot less liquid than the market for TBills. Now I don't know what price the Fed paid for those MBS but I find it hard to see how, in a more inflationary environment than when they bought plus in a market in which the biggest MBS buyer is now a seller, the Fed can achieve anything like the same price as the book value they're being held at.

If the Fed sells MBS at a loss to book value then, given the Fed's vast holdings, there is a chance that the Fed ends up insolvent. TBH I don't really understand what that means. Every since QE started I've been trying to get my head around what Central Bank insolvency means but struggle to understand how it happens and what the upshot would be. I've read some people I really respect on the subject but it quickly becomes obvious that they are a lot cleverer than mean and given the subject a lot more thought. If anyone can recommend an idiot's guide then this idiot would be very grateful!