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Fed’s Treasury buying spree

Oct. 29 (Bloomberg) — The Federal Reserve completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs.

Yields on the benchmark 10-year note, which help determine rates on everything from mortgages to corporate bonds, never rose above 4 percent after the central bank began acquiring the debt. They are less than half a percentage point higher than the day before the program was announced on March 18, even though the U.S. sold a record $1.25 trillion in notes and bonds, more than double the amount in the year-earlier period.

“The Fed’s purchases likely restrained rates from rising faster during the April through June period when 10-year notes went to about 4 percent,” saidGeorge Goncalves, chief fixed- income rates strategist in New York at Cantor Fitzgerald LP, one of the 18 primary dealers of U.S. government securities that trade with the Fed.

The purchases were the first of U.S. Treasuries by the central bank to keep borrowing costs low since the 1960s. The Fed joined its counterparts in the U.K. and Japan in extraordinary debt-buying programs, broadening efforts to unlock credit and end the worst recession since the 1930s after cutting the benchmark U.S. interest rate to a range of zero to 0.25 percent.

Final Purchase

The Fed bought $1.936 billion in debt today through eight securities maturing from December 2013 to September 2014, according to a Federal Reserve Bank of New York statement.

Longer-maturity Treasuries rallied the most since 1962 when the Fed said March 18 it would start buying the securities. That day, Treasury 10-yearyields fell almost half a percentage point to 2.52 percent as the Fed surprised investors by expanding the debt purchase portion of its so-called quantitative easing policy, which already included $1.45 trillion of agency and mortgage-backed debt.

The arrows below show the start and finish of the program on the S&P:

UK Income to Housing ratios

Fannie Mae Seriously Delinquent Rate

Subprime origination back to peak levels!

Wanna get a taste of how bad the next leg is gonna  be?

New mortgage loan originations considered “subprime” are taking back their pre-crisis market share levels, according to the most recent economic letter by the Federal Reserve Bank of San Francisco.

As the presence of private-label or non-agency securitization declined with the unfolding of the housing crisis, the market share of Ginnie Maesecuritizations — backed by Federal Housing Administration (FHA)-insured loans — swelled.

Since the middle of 2007, non-agency securitization and originations slipped, said San Francisco Fed economist John Krainer. Ginnie Mae, which bears the full faith and credit of the US government, stepped in to fill that gap as FHA activity soared. Ginnie’s activity, inlcuding agency securitization by Freddie Mac (FRE: 1.21 -6.20%) and Fannie Mae(FNM: 1.04 -7.14%), the agencies own or gurarantee nearly 96% of new residential mortgage lending.

Around 10% of originations in the San Francisco Fed’s Q406 sample were labeled by originators as “subprime,” according to Krainer. In the total US mortgage market, subprime loans accounted for about 20% of originations in 2006. Despite a nearly zero market share of subprime by Q108, Krainer said, increased FHA lending — identified in the securitization industry by Ginnie Mae’s share — revived the subprime segment of the market.

“After plummeting in early 2008, the share of borrowers with FICO credit scores lower than 660 has returned to just higher than 20%, the same share as when subprime securitization peaked in 2006,” Krainer said.

This reflation desperation is being undertaken on the backs of a workforce that is at an official 17% level if we look at U-6 unemployment! In 2006 the mortgage money was flowing into the hands of practically every one through endless HELOC’s and the most generous extension of unsecured credit in history.

Logic would suggest that if the party is roaring like 2006 that Irvine would once again be a center of irresponsible lending and the Ferraris are flying off the lot in Newport Beach.  The chart above shows the actual reality. Subprime is now almost completely government issued.

In very related news “Cash for Clunkers” added 47.4% of the total growth claimed for Q3 2009 with a 157.6% spike in motor vehicle output. With hedonic adjustments these figures are always suspect at the best of times but at this juncture the pressure to hit the number must have been intense (or simply mandatory if you wanted to retain your employment).

Futures all red

This is only the second time this year we’ve seen this. Also unusual over the last few days has been huge divergence between the Dow and the S&P:

U.S. Equities Will ‘Drop Painfully,’ Grantham Says

U.S. stocks will “drop painfully from current levels” in the coming year amid disappointing economic data and shrinking profit margins, according to investor Jeremy Grantham.

The so-called fair value for the Standard & Poor’s 500 Index is at the 860 level, the chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., which oversees about $89 billion, wrote in a quarterly report. The gauge fell 1.2 percent yesterday to 1,066.95. It has rallied 58 percent from a 12-year low on March 9 on rising confidence a U.S. economic recovery will boost corporate earnings.

“My guess, though, is that the U.S. market will drop below fair value” before 2010 is over, said Grantham, 71. “Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits.”

 

“Your deposits are absolutely safe”