Federal Reserve to Become Largest Holder of U.S. Debt in Just Over a Month?

October 1, 2010

Print Version

Source: Zero Hedge

Probably the most interesting thing in this week's Fed balance sheet update is that Treasurys held by the Fed are now $812 billion, an increase of $7 billion from the week before, which those who follow the FRBNY's almost daily POMO liquidity explosion know all too well. Indicatively, Japan owns $821 billion and China, $847 billion. We believe that within one week the Fed will surpass Japan as the second largest holder of Treasurys, and China, the current top holder, in just over a month. Another notable item: Fed excess reserves were at $981 billion, a decline from $1.01 trillion at the beginning of the month, but most notably, in the past month this number hit a year low of $932 billion on September 15. One wonders just what securities the banks were buying up with these reserves? Keep in mind the stock market closed essentially at the level it hit on September 20, making one wonder just how much of a factor the nearly $80 billion decline in bank excess reserves in the first two weeks of the month may have been.

Securities held outright: $2,044 billion, a decline of $7 billion from the week prior.
- Total Treasury holdings increased from $805 billion to $812 billion, the reason for the increase being of course the continuing UST purchasing via QE Lite. The Fed has bought $25 billion in Treasuries in September
- MBS holdings declined by $13 billion to $1.08 trillion, meaning that as we expected the level of prepaying is accelerating, as this was the biggest one week decline in MBS notional outstanding on the Fed's balance sheet since QE1 began
- Agency holdings were also flat at $154 billion.
Net borrowings: declined by $7 billion at $53 billion.
Float, liquidity swaps, Maiden Lane and other assets: $187 billion, an increase of $1 billion. FX liquidity swaps are at $61 million as the same bank that is experiencing a USD funding crisis continues to have no EURIBOR/LIBOR acces. The "value" of Maiden Lane I was at $28.4 billion. Maiden Lane II was at $15.8 billion, Maiden Lane III at $23 billion while AIA Aurora was $25.7 billion.
The monetary base was $1.958 trillion (more on M2 later)
Reserve balances with banks: $982 billion, a slight increase of $2 billion from the prior week.
Foreign holdings of USTs and MBS at a new all time high of $3.23 trillion, a slight increase of just under $2 billion W/W.