The Banking and Strategy Initiative

Chillin' out till it needs to be funded

The Fed Thursday Update: The Balance Sheet of $2.853 T and the debt ceiling

While the Fed had a decrease in foreign Currency assets almost to $8.2 B and seemingly sold away another $5.2 B of Maiden Lane III, it still added a $10 B in MBS holdings (QE3 again?) and its holdings of Treasuries were down by $9 B for the week even as new 10Y TIPS were lapped up by investors with demand thrice the no. of bonds on offer and the awarded 10Y inflation bond yield a negative 0.39%. This is unexpectedly the third such 10Y TIPS auction this year and still as popular as ever even as discussions on the new debt ceiling approval start heating up Capitol Hill weather.

A gridlocked Congress might mean a lot of brinksmanship and fireworks but on the spending cuts and the austerity US might want to match its cousins across the pond is still working out election year kinks and republican proposals will likely ensure in their own strange overdone way that no meaningful spending cuts are adopted just because we are borrowing more, this time beyond $16.2T ( the current ceiling) to $18.2T

The Fixed income markets are suggesting that the Fed is doing a great job but with 10Y yields now below 1.7% the not so coveted Safe haven status for the bond markets may be getting a little stiff under the collar for the Fed to carry more. Yet a change in stance has to await the completion of the election ritual and only more tweaking could still be made as apolicy move though yields could rise on their own only in a Risk on mode for markets. Global markets aren’t helping silenced by the wild gyrations in the fortunes of Spain and Greece but Facebook did ring the bell for that festive business friendly corner of Times Square ( albeit at home in Menlo Park) at 0930 EDT

On the Fed front though, while credit conditions had started looking up in the most recent report growing more than 6% in Y/Y comparisons of business credit, the MidAtlantic has again signalled a back step to the Empire State indice’s strength in manufacturing pointing to another break in the recovery rhythm from manufacturing itself.



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