The Autumn of Quantitative Easing

As the Fed begins to unwind it's $4.23 trillion hoard of debt, accumulated under its QE programs (about $2.45T in Notes, TIPS and floaters, and $1.78T in mortgage backed securities) we're treated once again to a series of articles, caused by the internet's multiplier effect, to the impending doom this will cause, and how it will "roil" the debt markets.

If there's anything this country doesn't need, it's more manufactured anxiety. Let's look at the numbers. Here is the path of accumulation of Treasury securities held by the Fed.

And in suitably Autumnal shades, the amount of Mortgage Backed Securities held.

It doesn't take too sharp an eye to notice the flatlining in both charts as the Fed stopped buying more assets back in October of 2014. And you don't have to be a Keynesian theorist to understand that this effectively "shrinks" Fed holdings by keeping them to a fixed dollar amount, and not by the percentage of paper outstanding.

We all get this, right?

Now the actual pace of unwinding remains a matter of speculation, as we only have the promise that it will be cautious and deliberate, so as not to upset the traders. But it's not as if this hasn't happened before, and at a pace that was not under our own control. This is a chart of the level of Chinese Treasury holdings since 2010: (Who can forget that needless hysteria?)

Note the steep decline of close to $600 billion in holdings from early 2014 to late 2016. In particular, note the $200 billion drop in just five months in the last half of 2016. And was the market "roiled" by this? Not much. It easily absorbed the supply, and despite the best efforts of some "financial" websites to stir up concern, the Treasury markets were not the least bit disturbed.

Another detail most commentators fail to observe is that the Mortgage Backed Securities being held are being converted into equity, month by month, as homeowners make their payments and shrink the amount of interest they pay. I know, I know: hard as it is to believe, debt can be amortized.

So why would anyone fret about a gradual unwinding of the Fed's holdings?

I'm told it generates clicks.

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FloMartin Securities, Inc.

Donald R. Davret, Investment Advisor Representative


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