Fed Spent Over $1 Trillion Buying Debt

However, this week market support from the Federal Reserve is supposed to end. If it keeps to its schedule, the Fed’s program to purchase mortgage-backed securities and Fannie/Freddie debt concludes on Wednesday, the last day of March.

“This is likely to be a big thing,” warns The Richebacher Society’s Rob Parenteau. “The Fed has bought over $1 trillion on government-sponsored entity (GSE) debt from the private sector. Private sector investors have taken the money the Fed has created. “Given the yield on near cash instruments, we believe investors have turned around and invested the proceeds from their GSE sales to the Fed in risky assets. We also believe some of these investors have replaced their GSE positions with Treasury bonds.

“So directly, the Fed has bid GSE prices up and suppressed GSE-related interest rates (think mortgage rates). Indirectly, the Fed’s money creation in the QE ops has suppressed Treasury yields and boosted prices of risky assets. At month end, then, a major prop beneath asset markets will go poof.

“Do you see that line in the powering through $1 trillion on April Fools’ Day? That represents the Fed’s QE purchases of GSE debt… and that is going to do a 180 -- it is bound for zero. What happens, then, when broker dealers, households and money market funds go to sell their GSE debt after March 31 and there is no Fed on the other side of the trade, with a bunch of blank checks, prepared to buy the GSE debt?

“Can you say train wreck?”