Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
One of the main surprises yesterday was the complete focus of Fed purchases on mortgage backed securities (MBS). After some thought last night I believe the reason for this is due to Operation Twist. At the end of 2012 Operation Twist 2.0 ends. This was not a balance sheet expansion type of program, just an asset swap of long term US bonds and short term US bonds. It is currently $45B a month. When that program expires at the end of the year, it would seem likely the Fed expands their QE by a like amount and can then go back to the Treasury market or do a mix of MBS and UST.
If accurate, at the beginning of 2013 the Fed’s balance sheet won’t be just expanding by $40B a month (just under half a trillion annualized) but $85B a month (just over a trillion annualized). Since there is no longer the prospect of speculating whether future QE will be happening all the Hilsenrath stories will now focus on how much larger (or in theory smaller – insert chuckle here) the month to month adjustments might be in the size of QE.
Bigger picture – if you believe the country’s unemployment issues are more structural (globalization, automation, et al) rather than cyclical this program will be in place for years.
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