August Existing Home Sales Disappoint, Fed Accounts For 50% of Q2 Treasury Purchases, Review of Fed Indefinitely Delayed

The equity market weakness yesterday and today have very little to do with the Fed statement contrary to what you may hear on the financial news networks. No game changing comments were issued by the Fed and this morning’s home sales number (August Existing Home Sales 5.10 mln vs 5.35 mln consensus; M/M change -2.7%) further highlights the continued need for easy credit. Don’t forget economic numbers that reflect a continued need for quantitative easing are equity market friendly. (please review the Sept. 17 post for a complete explanation)

I am, however, reprinting the following Zero Hedge story as it explores an impending issue that could be equity market bearish and must be monitored closely.

Federal Reserve Accounts For 50% Of Q2 Treasury Purchases
By Tyler Durden of Zero Hedge
Created 09/20/2009 – 15:13

The degree of intermediation by the Federal Reserve in the issuance of US Treasuries hit a record in Q2, accounting for just under 50% of all net UST issuance absorption. This is a startling number, as the Fed’s $164 billion in Q2 Treasury purchases dwarfs the combined foreign/household UST purchases of $101 billion and $29 billion, respectively, over the same time period. In fact, the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.

This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs: with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities, while Foreign purchasers, which many speculate are in a game of Mutual Assured Destruction regarding UST purchases, have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!).

Will the US make these purchases much more attractive come October when QE for USTs ends? And if so, what kind of rates are we talking about? One thing is certain: in terms of priorities of the Federal Reserve, keeping the equity market buoyant, is a distant second to ensuring successful auction after auction well into 2010. After all there is near $9 trillion in budget deficits that need financing over the next 10 years.

So, is it any surprise that the Fed doesn’t want a review of it’s structure and governance?

Fed to miss review deadline – WSJ WSJ reports the Federal Reserve won’t meet the U.S. Treasury’s Oct. 1 deadline to prepare a broad review of the central bank’s structure and governance, a Federal Reserve official said. The Treasury requested the study in June as part of its sweeping blueprint for revamping financial-system regulations, saying a review of the central bank was needed “to better align its structure and governance with its authorities and responsibilities.”…

In the face of these pressures, Fed officials have been reviewing the central bank’s practices on a range of fronts. Fed governor Betsy Duke is leading a study of the governance of the 12 regional reserve banks, vice chairman Donald Kohn has been leading efforts to improve the Fed’s transparency and Fed governor Daniel Tarullo has been leading a review of its bank supervision practices. It isn’t clear if the Fed will complete the study and, if so, when. A Fed official said it had become a low priority while other efforts are under way.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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