The Fed this week discontinued its regular Tuesday rollover of $20 billion of 28 day 1 day forward term repos. They took no action yesterday or today, allowing these repos to expire, thereby draining $20 billion from the system today. That drain is probably part of the reason why the market is as weak as it is today. The media blames today’s bad economic news, but that’s just the excuse. The economic news is bad every day. It only matters when liquidity is contracting.
The Fed is having difficulty with the spreads between GSE paper and Treasuries. They are again on the rise. Piled on top of a big jump in Treasury yields over the past week, this is a double whammy. Furthermore, it comes at a time when the Fed is beginning to make its direct purchases of MBS paper. Here’s another example of a Fed program that does not appear to be having the intended result. By announcing that it would buy, the Fed has apparently attracted more sellers than it bargained for. This is going to be a mess. How will the public, the politicians, and most importantly the market, react when they wake up and realize that not only is the Fed not omnipotent, it’s just throwing s**t on the barn door and hoping that something sticks?
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