Liquidity issues in the MBS and Treasury Markets

by istural

During today’s Fed call, they made a very important statement. This statement was that “There have been liquidity issues in the MBS and Treasury markets.”

They further went on to explain “Even during the Repo operations, we were not seeing the liquidity that we needed, and this is what spurred us to take action.”

This is a problem. The Treasury market is generally pretty useful for helping companies make payroll, help peg mortgage rates, and basically be a store of value.

When no one is buying treasuries, people start pulling cash out of the markets, and equities are instead sold instead of the treasuries. This leads to a decrease in price of equities, which is what we are seeing. This is why the fed has lowered the reserve requirements to 0 for the banks, and they have stopped doing share buybacks, because we need this stuff to continue churning along.

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The second part of this is MBS liquidity issues and in my opinion, is the smaller issue. If any of you tried to refinance last week, you would know that you are not getting quoted lower rates. This is because no one is buying MBSes. This caused interest rates to spike to over 4%, which is a problem for anyone wanting to buy a house. The reason the fed is buying them up is to lower rates for mortgages.

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**So what does this all mean?**

The fed, contrary to popular belief, is not trying to prop up the stock market. The fed is trying to propup the actual economy at this point with their actions. This isn’t necessarily a problem, however the issue is that if this continues, the Fed will run out of ammo, or worse, no one but the Fed is putting money into the system. This creates a cyclical effect where everyone is trying to get out at the same time, and you get crashes.

Variety of resources here that were talking about this before today:

finance.yahoo.com/news/plumbing-behind-worlds-financial-markets-131618535.html

www.nytimes.com/2020/03/12/business/economy/wall-street-funding-troubles-fed.html

www.cnbc.com/2020/03/15/coronavirus-mortgage-rates-will-fall-again-after-latest-fed-cut.html

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