Operation Twist II: Classic or Housing?

After the Fed, the curve of treasuries closed flattened to levels not seen since almost three years. An important point to consider is that in september 20 the Fed announced that would keep the rate for a extended period to 2013 without changes, and also the announced the program so called operation twist, which consist in selling the assets with three year or less and buying bonds with durations of 6 or more years wich owns under the SOMA program (System open market accounts). The intention was one more time is to make flatter the curve of bonds specialy the long end, to promote the U.S. economy without new money but increase the duration of the SOMA fund.

Why is this important? because the Fed could and i think will make another round of easing. In the Fed´s announcement of january 25, they extended the period of low rates for one more year through 2014, so in this way, i think they eased the road to another operation twist but in this time of mortgages maybe or extend the duration for one year of the selling in a renewed operation twist. They could sell, as he does, the front end of the curve, and buy mortgages or a mix of mortgages and bonds of medium and long duration. Why do the Fed need another year of low rates? because they assure demand of the front end of bonds in the auctions they will make, and maybe sell assets of durations of five or less years of duration. It´s important assure this demand because the front of the curve is in extreme low rates situation.

The difference between the classic Quantitative Easing (QE) and the operation Twist is that with the operation twist, there isn´t pumping of new money in the system, just an increased, not without risk for the SOMA, of duration in the SOMA fund. In the past the Fed preferred this way because of the critics to the QE for pumping money in the system by buying bonds with the increased risk of inflation. Still there are critics to the QE as a proper way to promote growth in the economy. With the operation twist of mortgages they could focus in the promotion of growth in the housing.

  

Operación Twist II: ¿Viviendero o clásico?

Spread de los  bonos americanos de 2 y 5 años

Después del anuncio de la Fed los spreads de los bonos americanos se cerraron  quizá no a mínimos históricos pero si a niveles no vistos desde 2009. Un punto importante a recalcar en estos momentos es que la Fed se encuentra también en un proceso llamado operación twist, anunciado en septiembre 20, que consiste en vender la deuda con duración menor a tres años que posee dentro del fondo administrado por el banco de Nueva York propiedad de la Fed (SOMA) mientras compra bonos de 6 a 30 años. La intención de dicha operación era aplanar la curva de bonos sin inversión de más dinero para incentivar la economía, en particular la viviendera con el consiguiente incremento de duración del fondo.

¿Por qué es importante recordarlo? Por que la Fed puede hacer y creemos que sí va hacer una nueva ronda de compra de bonos de mediano y largo plazo también llamado QE (de Quantitative Easing). El vínculo con el nuevo periodo extendido de tasas es que de esta manera puede hacer al mismo tiempo una nueva operación twist pero de hipotecas  o uno similar al actual pero extendido. El que hagan otro mecanismo para respaldar el crecimiento se ha descontado prácticamente, en particular muchos piensan que será una simple compra de hipotecas estilo QE de 2009 y 2010. Un QE es diferente en sus efectos al mercado que una operación Twist pues no hay inyección de dinero nuevo así que me inclino por una operación twist en lugar de un QE. La ventaja radica en que al mantener la tasa de referencia baja y anunciarlo, se asegura que existirá demanda de su papel de corto plazo que necesita vender para realizar las operaciones twist. La última vez se dio preferencia a hacer este tipo de operaciones twist a inyectar más dinero al mercado vía un QE. Creo que en esta ocasión esa será una razón que considerarán al momento de decidir qué herramienta usar para incentivar la economía o el mercado de viviendas. Esta idea del twist viviendero no lo hemos visto mencionado en ningún lugar ni hay una referencia por lo que dejo la idea a su consideración.

Spread de los  bonos americanos de 2 y 7 años

Quiero aprovechar también para comentar el riesgo que implica tener las tasas tan bajas y la curva tan aplanada. Lo hemos comentado varias veces, los bancos piden prestado en el corto plazo y prestan a largo plazo, todo esto funciona bien mientras el diferencial entre la tasa a la que prestan y a la que se financian es suficiente y la tasa de corto plazo es baja. ¿Qué pasa cuando la curva está tan plana como ahora y empieza a incrementarse la parte corta? ¿Qué habrán pensado los bancos al ver en el reporte de ayer que la tasa a la que creen (la Fed) que se debe estar en aproximadamente 5 a 6 años es 4%; o algo más cerca, un  2% en tres años? Por que esa es la tasa que al menos, en el mejor de los casos, si no hay choques como dice la Fed, estarán pagando por el dinero cuando ahora están prestando en promedio 2% o 3% en el largo plazo, o al menos esa es la intención de le Fed. No hay que pensar mucho qué va a pasar cuando la Fed suba la tasa. Tal vez ahí el por qué los bancos no quieren prestar.

Synthetic QE3?

Today, December 4, the markets started to make concious about the huge amount of redemptions of bonds in several countries which must be refinanced in one way or another. The amount needing to be refinanced rises to $8.5 Tn with payment of coupons included.

The search of investor would be complicate considering that the rating agencies have given clear signs of his intention of cutting the rating of at least 15 members of the Eurozone, with the rising cost of rollover the debt that this means.

U.S. has no problem getting buyers of the debt that is maturing and we will see it later. The case for Japan is a little different because they have a rollover issue of $ 3,000 bn in 2012. In Japan their Pensions funds have been more prone to sell rather than buying Japanese bonds by demographic themes so maybe they won´t be there to help.

Italy announced that he has refinanced half their needs of 2012 taking advantage of the LTRO program sponsored by  ECB. Considering just the other half that Italy needs and the debt maturing in France and Spain the amount at risk is $800 bn needing to be refinanced, amount more managable. 

Now, lets consider the U.S. case. If we remember, last november 29 the Federal Reserve reinstated the swap arrangement program between central banks to mitigate the growing funding pressures coming from the European system. Emphasys added.

These swap facilities respond to the re-emergence of strains in short term funding markets. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions and for the Federal Reserve to deliver foreign currency to U.S. institutions if conditions warrant. At present, there is no need for the Federal Reserve to offer liquidity in foreign currencies

......

Agreements governing U.S. dollar swap arrangements with the Bank of Canada, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank were announced ....On November 30, 2011, these central banks also agreed to establish temporary bilateral swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies. These swap lines are authorized through February 1, 2013.

On December 30 the Fed also lowered the rate on 50 bp of these swaps arrangements. Also the ECB on December 22, as we have mentioned on several occasions, loaned to banks €500 bn as part of the LTRO program.

Reviewing the operations conducted under the LTRO program shows that, there is a match between what is delivering to tight deadlines and what is getting from the Fed, in other words, some of the money the ECB is putting under this program very could well be from the Fed. Are two cases so far but we could speculate that the program of the swap arrangements between central banks could continue for another three years until the end of LTRO loans.

Imagine the mechanics. ECB asked dollars to Fed at 0.5%, by the LTRO program provides this money to european banks at 1% as a loan that matures in three years. The bank then could cover this loan by buying Treasuries. Remember, the cost along the U.S. curve is more or less 2.7%. That means the bank could take a carry of 1.7%. 

Banks earn this carry and the Fed doesn´t need to deliver another round of QE because the Eurpoean banks will be there to bid and keep the curve flat, all this, just for lend to the ECB.

QE3 sintético de Estados Unidos

El día 4 de diciembre los mercados empezaron a tomar conciencia de lo que se avecina respecto a los vencimientos de deuda de los gobiernos a nivel mundial que tendrán que refinanciar de alguna manera u otra. Las cifras de vencimientos son importantes y junto con pagos de cupones rebasa los 8.5 trillones de dólares. 

La búsqueda de inversionistas va a ser complicada considerando que las calificadoras han dado señales claras que están considerando reducir la calificación a 15 países de la zona lo que implicaría mayores costos de financiamiento. Y como hemos mencionado en varias ocasiones no es que falte algún inversionista que quiera comprar, el tema está en el rendimiento al que esté dispuesto a entrarle.

Estados Unidos no tiene problemas para colocar nueva deuda veremos un poco adelante por qué con un poco más de detalle. En el caso de Japón que tiene vencimientos por 3 trillones dólares podría tener problemas para colocar su deuda ya que por temas demográficos su fondos de pensiones han ido en transición a ser convertirse en vendedoras de bonos japoneses pero por otro lado, también hay que considerar que tienen una balanza comercial superavitaria por lo que no necesariamente podrían necesitar de extranjeros que compren su deuda pero ya veremos a qué nivel de tasa coloca.

En el caso de Italia ya lleva refinanciado la mitad de los vencimientos del 2012 aprovechando el programa LTRO. Si consideramos la mitad que falta de colocar de Italia y los vencimientos de Francia y España el monto en riesgos por emitir en nueva deuda es de $800 bn.mucho menor y más manejable.

Ahora consideremos el caso de Estados Unidos, si recordamos el 29 de noviembre la Fed reinstaló la líneas swaps para paliar las presiones de fondeo que crecían en Europa. El subrayado es nuestro.

These swap facilities respond to the re-emergence of strains in short term funding markets. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions and for the Federal Reserve to deliver foreign currency to U.S. institutions if conditions warrant. At present, there is no need for the Federal Reserve to offer liquidity in foreign currencies

 ......

Agreements governing U.S. dollar swap arrangements with the Bank of Canada, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank were announced ....On November 30, 2011, these central banks also agreed to establish temporary bilateral swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies. These swap lines are authorized through February 1, 2013.

El día 30 de Diciembre la Fed también bajó a 50 bp la tasa de estas líneas swaps. El ECB el día 22 de diciembre como hemos mencionado en diversas ocasiones colocó medio trillón de euros con bancos. 

Se puede ver la coincidencia de vencimientos y montos.

Revisando las operaciones realizadas bajo el programa LTRO se observa que hay una concordancia entre lo que esta entregando a plazos cortos y lo que está recibiendo por parte de la Fed. En otras palabras, una parte del dinero que está colocando el ECB bajo este programa muy bien podría ser de la Fed. Son dos casos hasta el momento pero podríamos especular que el programa de las líneas swap entre bancos centrales se podría continuar hasta dentro de tres años que están los vencimientos del LTRO.

Imaginemos la mecánica de esta manera. El ECB pide a la Fed dólares a 0.5% y con eso se fondea, en el programa LTRO presta este dinero a 1% y el banco para no arriesgarse a invertirlo en un bono gubernamental europeo se cubre comprando bonos americanos quizá de mediano o corto plazo, recordemos que el costo de financiamiento a lo largo de la curva de Estados Unidos es 2.7%. El banco aseguró 1.7% sin problemas y La Fed no tuvo que anunciar otro QE por que los bancos europeos lo harán por él, mantendrán la curva abajo y no tuvo más que prestarle al ECB. 

Krugman v. Krugman by Marginal Revolution

As we mentioned yesterday about the comment of krugman in NY Times about the debt of U.S. sounds good but more like a idea than reality.

Here is the comparation made by Marginal Revolution of Krugman in different times.  


Krugman v. Krugman:
Paul Krugman (Jan 1, 2012):
People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

…while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.

…nations with stable, responsible governments — that is, governments that are willing to impose modestly higher taxes when the situation warrants it — have historically been able to live with much higher levels of debt than today’s conventional wisdom would lead you to believe.

Paul Krugman (March 11, 2003):

…last week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.

…we’re looking at a fiscal crisis that will drive interest rates sky-high….But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.

…How will the train wreck play itself out? ….my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.

Now to be fair, Krugman covered himself in 2003 in a credible way he said “unless we slide into Japanese-style deflation, there are much higher interest rates in our future.” Thus, I do not fault Krugman’s forecasting ability. What I do fault is that despite a 180 degree about-face, one thing remains constant in all of Krugman’s writings, anyone who disagrees with him is portrayed as a mendacious idiot. In truth, Heritage today and Krugman 2003 both have legitimate concerns about the long-term debt situation of the United States and it would have been to the credit of Krugman 2012 had he acknowledged that point more fairly.

Krugman on US debt at NY times

Interesting comment in NY Times by P. Krugman on the levels of U.S. debt. He mentions the mistake made by comparing the debt of U.S. with the case a family which takes a great debt.

Two interesting and important points, but that leaves you wondering. First Do families have to pay their loans but not the United States? In the families as in the governments the problem isn´t get a loan, the important thing is the interest rate at wich they pay for the money. Does the debt of the united states is money that citizens owe to themself?

Sí debes pagar tus deudas, los gobiernos no.

Interesante comentario en NY Times de P. Krugman respecto a los niveles de deuda de los Estados Unidos. Menciona el error en que incurren los que comparan la deuda de E.U. con el caso de una familia que toma una gran deuda.

Dos puntos importantes e interesantes pero que te dejan dudando. Primero ¿Las familias tienen que pagar sus deudas, los gobiernos no? ¿Y sólo tienen que cuidar la velocidad a la que crece ésta? y segundo ¿ El dinero que debe los Estados Unidos a diferencia de las familias es dinero que se deben a sí mismos?

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