Sunday, August 9, 2009

The Debts of the Spenders: The POMO Controversy Revisited - A Closer Look at ABX and CMBX Indices

Recently, the blogosphere has been abuzz w/speculation about Permanent Open Market Operations (POMO) and the potential for a levered ramp job in the equities markets. Most writers' attention has been focused on outright Treasury purchases. The jury is still out on whether correlation = causation.

In the meantime, remember there are 3 areas in which the Fed's POMO intervenes : 1) outright treasuries, 2) agencies, and 3) agency MBS.

Don't forget to include the prominence of the latter 2 categories. Fed buying of agency/agency MBS is NECESSARY to maintain low spreads on the ABX and CMBX indices (moreso the ABX indices b/c the focus is on Fannie Mae/Freddie Mac GSE debt but there may also be spillover effects in trading from related sectors) in credit markets. Especially telling when you consider Asian lenders are no longer buying those debt classes as vigorously as before.


Instead, nations like Taiwan and China have drastically cut their Agency MBS and Agency debt positions ... but to do so they had to increase their treasury positions. They have, however, cut the maturity on their treasury portfolio to shorter term durations.

Fixed income speculators like PIMCO and Blackrock stepped in late last fall to buy up agencies in the belief that the Fed would backstop these purchases. And they were correct.

In today's environment, stabilization of particular credit markets and lending in general remain important objectives of the Fed and Treasury.

To see some nice ABX and CMBX charts:
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