Federal Reserve Surpasses 3 Trillion Dollar Balance Sheet

As of this week, the Federal Reserve has officially gone over $3 trillion in its balance sheet. It is buying MBS and bonds as promised. Of course this has consequences as I pointed out here. The euro made a 1 year high against the U.S. dollar. U.S. bond yields are breaking resistance at 1.92% yield on the 10 year treasuries.

What's very odd is that the gold price keeps languishing. A weak dollar environment should be very bullish for gold.

Chart 1: Federal Reserve Balance Sheet

Table 1: Federal Reserve Balance Sheet (detailed)

Fed has started QE3

It seems that the Federal Reserve has finally jump-started the QE3 program.

Mortgage backed securities went up from $852 billion to $893 billion in the month of November 2012. That's a $40 billion increase, precisely right on schedule according to its press release in September 2012, where it stated to buy $40 billion in MBS's each month.

Chart 1: Federal Reserve Balance Sheet

Chart 2: S&P 500

If we put together Chart 1 and Chart 2, we can find a significant correlation.

Chart 3: Federal Reserve Balance Sheet Vs. S&P

The same can be said on gold prices Vs. Federal Reserve balance sheet (Chart 4).

Chart 4: Gold Vs. Fed Balance Sheet

You know what this means, start to buy equities and gold as the correlation between stocks/gold and the federal reserve balance sheet is a fact.

A Detailed Federal Reserve Balance Sheet

Just by having heated (and uncomfortable) discussions with seekingalpha commenters I learn new things. This is what you get when you write financial articles without any financial background.

But there are positive things coming from discussions.
Today I found a very nice interactive chart to follow the Federal Reserve's balance sheet (Chart 1).
You can play with the interactive chart here:
http://clevelandfed.org/research/data/credit_easing/index.cfm

Chart 1: Detailed Federal Reserve Balance Sheet

And what's very interesting is that the federal reserve has massively increased their treasury holdings. It's no wonder that bond yields are going down in the market. It won't be long when the federal reserve's balance sheet consists only of treasuries and mortgage backed securities, which are the most risky assets in the world.

The Simplified Bank Stress Test

Bloomberg reported on 20 August 2012 that banks are stepping up their U.S. treasury buying. As deposits increased 3.3% to $US 8.88 trillion in the two months ended July 31 2012, business lending rose 0.7% to $US 7.11 trillion, Federal Reserve data show. This inherently means that banks aren't lending money to the private sector, but are lending their money to the U.S. government. Peter Schiff pointed this out on the Peter Schiff Show of 20 August 2012. Banks bought $US 136.4 billion in bonds (TLT) already this year, pushing their holdings to $US 1.84 trillion.

Let's take a snapshot of the debt maturities in 2011 and 2012 and quickly compare them (Chart 1 and  Chart 2: U.S. treasury debt by Year of Maturity (2012) ) (I talked about debt maturities in this article).

Chart 1: U.S. treasury debt by Year of Maturity (2011)

Chart 3: 10 year U.S. treasury yield 

You can immediately see that short term debt has doubled in 1 year time. The biggest buyers of these treasuries were the federal reserve, domestic investors, banks, emerging markets like Japan and China. It's no wonder that bond yields have gone down with all this buying of U.S. treasuries. But these yields have started to rise sharply just recently, topping 1.85% for the 10 year U.S. treasuries (Chart 3).

If you want to know what impact this will have on the banks, go read the full version of this article.

Spain is following Greece in its path to bankruptcy

The situation in Spain is looking worse every day. I believe Spain is following the path of Greece into bankruptcy.

Let's take a look at the Spanish bond yields. At the end of 2011 we got the massive ECB bailout package named Long Term Refinancing Operation (LTRO). This relieved the bonds of certain peripheral governments like Italy, Greece and Spain. Lately though, with many Spanish regions on the verge of bankruptcy, Spanish bond yields are rising again. Let's take a quick look at these.

The best way to look at stress in the bond yields is to look at the bond spread between long term maturities (Chart 1) versus short term maturities (Chart 2). If the spread narrows, it means there is stress, because the shorter maturity is about to rise above the longer maturity bond yield. Normally in a healthy economy, longer maturities always have higher yields than shorter maturities. If this is not the case, this means that defaults are looming (see Greece bond yields: shorter maturities have higher yields than longer maturities).

To read the analysis go HERE.

Chart 1: Spanish 10 year bonds

Chart 2: Spanish 2 year bonds