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Fed Finally Settles First Round Of MBS Offsetting Other Negatives in Liquidity

Liquidity indications were neutral this week, thanks to ongoing panic inflows of cash from Europe, as well as the fact that the Fed finally started settling the MBS purchase commitments that have been building up, but had gone unsettled since October. These positive flows offset the negatives of bank and FCB selling of Treasuries.

The Fed had previously reported that it had purchased $41 billion worth of MBS due for settlement in December. Net MBS settlements last week, after any MBS paydowns, totaled $31 billion, so the Fed settled the greater part of the purchases scheduled for December, or perhaps all of them. This begins to fill the hole that the Fed had been digging in its balance sheet as a result of the delayed purchases. However, the total size of the Fed’s System Open Market Account remains below its stated target, even after the settlement of these purchases and $53 billion of currency swaps with other central banks.

It’s not possible to know specifically the gross amount of MBS purchases settled in a given week. The paydowns and purchases are reported as a single line item. While the Fed publishes how much is due for settlement each month, it does not publish the weekly amounts. It does appear however that the settlements were scheduled to coincide with the big mid month Treasury issuance, helping the Primary Dealers to absorb the new supply.

This was help that it turns out they did not need, given the Treasury buying panic coming out of Europe, the effects of which I discussed in the Treasury update titled The Last Ponzi Game, posted last Friday.

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