Trillions of dollars are about to flow from the Fed into the stock market. QE has returned, stronger than ever.

by quiethandle

EDIT: The Fed will charge the 1 year overnight index swap rate plus 10 basis points for these loans. Sounds like right now that works out to roughly 5%, so this might be a high enough interest rate to deter banks from flooding the Fed with these long-term treasuries and effectively causing massive QE. We will have to see.

From this article:

www.cnbc.com/2023/03/12/regulators-unveil-plan-to-stem-damage-from-svb-collapse.html

“The Fed facility will offer loans of up to one year to banks, saving associations, credit unions and other institutions. Those taking advantage of the facility will be asked to pledge high-quality collateral such as Treasurys, agency debt and mortgage-backed securities.

…the Fed said it will ease conditions at its discount window, which will use the same conditions as the BTFP. However, the new facility offers more favorable terms, with a longer duration of loans of one year vs. 90 days. Also, securities will be valued at par value rather than the market value assessed at the discount window.

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The haircut, or reduction in principal, issue is critical as there are estimated to be some $600 billion in unrealized losses that institutions possess in held-to-maturity Treasurys and mortgage-backed securities.”

This means that every bank out there that stupidly bought 10,20,30 year treasuries at high prices (low yields) and are now bag-holding with unrealized losses on these bonds will run straight to the Fed and loan them to the Fed in exchange for the PAR VALUE (read, the value of the bonds at maturity – i.e. as if the banks don’t have a loss on these bonds) in CASH. Now, what will the banks do with this cash? They are required to hold stable, safe assets that have a return, and that equals short term treasuries (and with the yield curve inversion, short term returns more than longer term anyway, so win-win for the banks). So, they are going to go onto the open market and buy these short term treasuries. The entities that sell them the treasuries will now be flush with cash and will likely buy stocks with that money.

The article gives the $600 billion figure as just the ON PAPER LOSSES, NOT THE VALUE OF THE BONDS. If the losses are $600B, then the overall value of the bonds’ PAR value will be MULTIPLE TRILLIONS. All of those bonds will be loaned to the Fed by the end of the week, and by the end of next week, all of that money will be in the stock market.

Edit: The article does not say what kind of interest rate the Fed will charge on these loans. If the Fed charges an interest rate that is approximate to short-term treasuries, then it may not make much financial sense for banks to run out and do this wholesale. Has anyone seen any info from the Fed about the interest rate they will charge for these 1-year loans?

Edit 2: The Fed will charge the 1 year overnight index swap rate plus 10 basis points. Sounds like right now that works out to roughly 5%, maybe a bit more. So maybe it’s not instantly free money for the banks, but the fact that they can borrow more than their collateral is worth could make it worth their while to take this loan.

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