Commentaries

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Tidbits from the FOMC minutes…

Just going through the FOMC minutes now and there were a couple of interesting bits worth flagging:

Meeting participants again discussed the merits of including agency MBS backed by adjustable-rate mortgages (ARMs) in the Committee’s MBS purchase program:
Some thought it would be useful to include agency ARM MBS, noting that doing so could reduce
the unusually large spreads between ARM rates and yields on similar-duration Treasury securities—spreads that were far larger than the comparable spreads on fixed-rate mortgages; others saw little potential benefit, given the small stock and limited issuance of ARM MBS, and were hesitant to involve the Federal Reserve in another market segment. The Committee made no decision on purchasing ARM MBS at this meeting.

It just seems odd that they would be discussing expanding the MBS purchasing program at all when the debate seems to be hinging on whether it’s time to think about pulling back on it. See my posting on it here. Also, not sure they want to be in the business of stimulating riskier segments of the mortgage market.

Participants also discussed the merits of progressively reducing the pace at which the Federal Reserve buys Treasury securities, agency debt, and agency MBS prior to the end of the asset purchase programs. They generally were of the view that gradually slowing the pace of the Committee’s purchases of $300 billion of Treasury securities and extending their completion to the end of October could help promote a smooth transition in markets. A number of participants noted that a similar tapering of agency debt and MBS purchases could be helpful in the future as those programs approach completion. The Committee made no decisions on tapering those purchases at this meeting.

FOMC tripping over Treasury auctions

It’s an age old complaint from bond investors – FOMC meetings in the middle of quarterly refundings screw up the bid. After all, who wants to aggressively bid on new Treasurys on the auction block before they know what the Fed is going to say about interest rates – or in today’s world, what they’re going to with their Treasury purchases.

This week, Treasury will sell $75 billion new notes, starting with $37 billion 3-year notes on Tuesday and $23 billion on Wednesday. The auction deadline is 1pm, so primary dealers as well as institutional investors and central banks will have to put in their orders well before the outcome of the 2-day FOMC meeting (annoucement due around 2:15 on Wednesday) is known. That the Fed could signal the end of its $300 billion Treasury purchase program during this meeting makes it even more fun.

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