Picture du Jour: The Fed’s ballooning balance sheet

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The following from Ian Mathias, co-author of the 5 Min. Forecast: “One good reason to guard your finances in 2010: The Federal Reserve’s balance sheet has quietly ballooned back to near-record highs. The Fed announced yesterday that its balance sheet expanded to $2.22 trillion last week, its grossest level in nearly a year and just a hair from an all time high. Hmmm … if Mr. Bernanke assures us the recession is ‘very likely over,’ then why is the Fed balance sheet in crisis mode? What are they worried about?


Source: The 5 Min. Forecast, December 29, 2009.

“The Federal Reserve went from a non-existent player in the mortgage backed security market a year ago to owning $904 billion of the stuff today. The ‘private’ bank has clearly moved its aim from the financial sector to housing, loading up on MBS, debt spilling out of Fannie Mae and Freddie Mac and Treasury bonds (a handy way to suppress mortgage rates),” said Mathias.

The chart below shows monthly data for the ten-year Treasury Note yield since 1998 and conveys an important message when considering the two momentum-type oscillators at the bottom (ROC and MACD). The ROC reversed course (crossing the zero line) about two months ago for the first time since a buy signal was given at the beginning of 2007 and now indicates a primary sell signal. The MACD provided a similar indication seven months ago. Although oversold in the near term, with massive issuance looming and inflationary pressures building government bonds are not the place to be in 2010.


Source: StockCharts.com

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