Guest Post: The Collapse Of The Non-Backstopped Agency Market

Submitted by Tyler Durden of Zero Hedge

Complete collapse in foreign interest for GSE debt: North American holdings of the latter have increased from 50% to 80% of total notional in one year!

Primary Dealers are selling corporates in droves in order to purchase Treasuries and MBS under the Fed’s gun. Primary Dealers now have a record $368 billion in Corporate, Agency, MBS and Treasury inventory. And the vast bulk of PD holdings of agency debt has less than a 3 year maturity.

The Fed has bought $103 billion in Agencies, almost half of which matures in the next 3 years. Amusingly, the roll coincides when roughly $1 trillion of CRE debt comes due. Good luck.

And just in case you are curious who it is that purchases all those low, low coupon MBS out there: the Federal Reserve has bought almost half a trillion at a coupon less than 4.5%. Does Ben Bernanke honestly believe that taxpayers generating a 4.5% return is enough to continue to finance the homeownership mania? With housing prices still collapsing, it is only a matter of time before taxpayers take collosal principal losses on all these MBS, compliments of yet another completely failed risk assesment by the Federal Reserve.

hat tip Richard

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  1. Richard Kline

    Tyler, would you do a temporal breakdown of those MBS purchases by the Fed? Has their purchasing accelerated this year? When was most of this inventory bought. The plan, always, by the zombie banks was to get someone to buy up their ABS crap, most especialy MBS nuke waste at near face. Or did I misread you and the large part of this MBS 'inventory' is actually swap-stuff which, in principle, the banks are supposed to repurchase whe they are, y'know, financially sound again? (Like never.) Give us a bit more on this, please.

  2. Brick

    I was a bit surprised that Freddie had a whole load of Fannie MBS in its portfolio which I think would increase systemic risk. It is also interesting to note the REMIC structure and what happens if house prices continue to fall. The other question must be what are institutional investors not buying so that they can buy this stuff. The implications are that somebody will most likely be left holding the bag (mostly not the FED) and the yield on the AAA tranches of the REMIC could fall leaving the FED as the only buyer.

  3. Hugh

    "The implications are that somebody will most likely be left holding the bag (mostly not the FED)"

    I can't give you a link at the moment but I have read where losses in Fed programs are to be transferred to Treasury,i.e US taxpayers.

  4. jessi_composed

    Newest today is that housing has hit bottom. I'm just not sure I'm on board with that. yeah maybe metro areas, but not the majority of Americans…confidence is at a low, so how are they expected to buy houses?
    Let me know what you think:

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