The July 2009 edition of the Brinker Fixed Income Advisor is online at www.BrinkerAdvisor.com. This month we review our key economic indicators and provide our views on what we expect in the second half of 2009.

Filed under: General, Investment Letter
Posted on July 1st, 2009 by Bob Brinker

This morning (6/1/09) the Bureau of Economic Analysis (BEA) released the April Personal Income report. Below is a 5 year chart of the headline and core PCE inflation rate. In April, the headline rate fell to +0.44% year-over-year and the core rate rose to +1.89% year-over-year. One thing is very obvious from this chart – nobody should be worried about inflation right now. In fact, if you were an FOMC member, you would be doing your best to generate inflation based on the latest figures.

Filed under: Federal Reserve, General, Inflation
Posted on June 1st, 2009 by Bob Brinker

The June 2009 edition of the Brinker Fixed Income Advisor is online at www.BrinkerAdvisor.com. This month we review some of our favorite credit market indicators, provide our views on which fixed income securities are likely to outperform, and make a change to our model portfolios.

Filed under: General, Investment Letter
Posted on June 1st, 2009 by Bob Brinker

Today (May 15) we updated our online database of upcoming municipal bond auctions with 722 new issues. These include a $1 billion offering in Florida, a $750 million offering in California, and a $600+ million offering in Pennsylvania.

For just $99 you can start your 1-year subscription to the Brinker Fixed Income Advisor today.

Filed under: Investment Letter, Municipal Bonds
Posted on May 15th, 2009 by Bob Brinker

The May 2009 edition of the Brinker Fixed Income Advisor is online at www.BrinkerAdvisor.com.

Filed under: General, Investment Letter
Posted on May 3rd, 2009 by Bob Brinker

Today we refreshed our online database of upcoming muni bond offerings with 619 newly announced deals across the country. Subscribers may access on the online database at www.BrinkerAdvisor.com.  Below are some of the largest deals:

$833 million – City of NY

$650 million – New Jersey Turnpike Auth

$600 million – Miami-Dade Country

$440 million – State of Washington G.O.

$400 million – State of North Carolina G.O.

$398 million – State of New Jersey

Filed under: General, Investment Letter, Municipal Bonds
Posted on April 16th, 2009 by Bob Brinker

The April 2009 edition of the Brinker Fixed Income Advi$or investment letter will be mailed to subscribers on Wednesday April 1st.  It is also available online for subscriber access at www.brinkeradvisor.com.

Filed under: General, Investment Letter
Posted on March 31st, 2009 by Bob Brinker

Statement Regarding Purchases of Treasury Securities

March 18, 2009

The Federal Open Market Committee (FOMC) has announced that the Open Market Trading Desk (the Desk) will begin a Treasury purchase program of up to $300 billion to help improve conditions in private credit markets. The Desk will concentrate purchases in the 2- to 10-year sector of the nominal Treasury curve, although purchases will occur across the nominal Treasury and TIPS yield curves. Consistent with prior outright Treasury purchases, these purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk’s FedTrade system. On average, the Desk will purchase Treasury securities two to three times per week. Further details will be provided early next week after consultation with the primary dealers and other market participants. The Desk plans to hold the first purchase operation late next week.

Filed under: Federal Reserve, General, U.S. Treasury
Posted on March 18th, 2009 by Bob Brinker

Press Release

Release Date: March 18, 2009

For immediate release

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion.  Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.  The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.  The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Filed under: Federal Reserve, General
Posted on March 18th, 2009 by Bob Brinker

Today from the Fed …. (see release)

In carrying out the Financial Stability Plan, the Department of the Treasury and the Federal Reserve Board are announcing the launch of the Term Asset-Backed Securities Loan Facility (TALF), a component of the Consumer and Business Lending Initiative (CBLI).  The TALF has the potential to generate up to $1 trillion of lending for businesses and households. 

The TALF is designed to catalyze the securitization markets by providing financing to investors to support their purchases of certain AAA-rated asset-backed securities (ABS).  These markets have historically been a critical component of lending in our financial system, but they have been virtually shuttered since the worsening of the financial crisis in October.  By reopening these markets, the TALF will assist lenders in meeting the borrowing needs of consumers and small businesses, helping to stimulate the broader economy.

Under today’s announcement, the Federal Reserve Bank of New York will lend up to $200 billion to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans, and SBA-guaranteed small business loans.  Issuers and investors in the private sector are expected to begin arranging and marketing new securitizations of recently generated loans, and subscriptions for funding in March will be accepted on March 17, 2009.  On March 25, 2009, those new securitizations will be funded by the program, creating new lending capacity for additional future loans.

The program will hold monthly fundings through December 2009 or longer if the Federal Reserve Board chooses to extend the facility. 

Today the Board also released revised terms and conditions for the facility and a revised set of frequently asked questions.  The revisions include a reduction in the interest rates and collateral haircuts for loans secured by asset-backed securities guaranteed by the Small Business Administration or backed by government-guaranteed student loans.  The modifications are warranted by the minimal credit risk on these assets owing to the government guarantees, and, by making the terms of the TALF loans more attractive, they should encourage greater flows of credit to small businesses and students.

Additional details of the TALF and the CBLI can be found at http://www.financialstability.gov/.  Further information on the Federal Reserve’s credit and liquidity programs is available at http://www.federalreserve.gov/monetarypolicy/bst.htm.  The Treasury Department also released a new white paper outlining efforts to unlock credit markets. On February 10, 2009, the Board and Treasury announced an expansion of TALF to include new asset categories that could generate up to $1 trillion in new lending.  Teams from the Treasury Department and Federal Reserve are analyzing the appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and are evaluating a number of other types of AAA-rated newly issued ABS for possible acceptance under the expanded program.  The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can most efficiently be added to the TALF at a low and manageable risk to the government.

The Federal Reserve and Treasury currently anticipate that ABS backed by rental, commercial, and government vehicle fleet leases, and ABS backed by small ticket equipment, heavy equipment, and agricultural equipment loans and leases will be eligible for the April funding of the TALF.  Other types of securities under consideration include private-label residential mortgage-backed securities, collateralized loan and debt obligations, and other ABS not included in the initial rollout such as ABS backed by non-auto floorplan loans and ABS backed by mortgage-servicer advances.  As is the case for the current categories of newly originated loans, the TALF will combine public financing with private capital to encourage the private securitization of loans in the asset classes eligible in the expanded program.

Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve’s balance sheet.  In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system.  The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives.  Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.

Key Dates for the TALF
Schedule for First Funding with Initial Eligible Assets

Date
Announcement/Event

March 3, 2009
Launch of the TALF. Publication of the details for the first funding

March 3-17, 2009
Marketing first funding to investors

March 17, 2009
Subscriptions for first funding for TALF recorded

March 25, 2009
First funds from the TALF disbursed

Schedule for Second Funding

Date
Announcement/Event

March 24, 2009
Announcement of details of second funding

March 24-April 7, 2009
Marketing second funding to investors

April 7, 2009
Subscriptions for second funding for TALF recorded

April 14, 2009
Second funds from the TALF disbursed

Filed under: Federal Reserve, General
Posted on March 3rd, 2009 by Bob Brinker

The March 2009 edition of the Brinker Fixed Income Advi$or investment letter will be mailed to subscribers on Monday March 2nd. It is also available for online access today.

Filed under: General, Investment Letter
Posted on March 2nd, 2009 by Bob Brinker

This morning we have reloaded our online database of upcoming municipal bonds. More than 550 upcoming offerings have been published. A few notable deals include a $614 million g.o. from the State of Georgia, a $525 million g.o. from the Commonwealth of Massachusetts, and a $300 million g.o. from the State of Connecticut.  The largest deal in the database is a $950 million offering from the Los Angeles Unified School District.

Subscribers may access our online database of upcoming municipal bond offerings anytime at www.BrinkerAdvisor.com. Below is a sample of the results:

Filed under: General, Municipal Bonds
Posted on February 14th, 2009 by Bob Brinker

The New York Times has a list of the major provisions in the most recent stimulus bill expected to be passed by the House and Senate on Friday. Here are a few key items:

Income Tax credit of $400 for individuals / $800 married couples. Phases out on income over $75,000 for individuals / $150,000 for married couples. It is a refundable credit - so you do not need to owe taxes in order to receive the refund.

Feds will subsidize up to 65% of your COBRA costs for up to nine month if you lose your job between 9/1/08 and 12/31/09. Your income cannot be more the $125,000 individuals / $250,000 married couples.

Social Security refundable $250 tax credit for retirees and disabled people.

Ability to deduct state and local sales taxes on NEW car purchases.

Higher education tax credit

Expansion of 529 plan - additional expenses such as computers & software permitted.

First-time home buyer tax credit of 10% of purchase price up to $8,000 between 1/1/09 and 12/1/09.

Alternative Minimum Tax fix to prevent millions of taxpayers from having to pay the AMT in 2009.

According to CNN the vote is scheduled for the House and Senate tomorrow.

Filed under: Ginnie Maes, Gross Domestic Product, Public Debt, Taxes
Posted on February 12th, 2009 by Bob Brinker

Below are two current general obligation municipal bond offerings. The first is a $430 million offering from the State of Massachusetts. The second is a $300 million offering from the State of Connecticut. A quick look at the pricing on these deals shows that yields have fallen quite a bit in the past several weeks.

Massachusetts G.O.

Connecticut G.O.:

Filed under: General, Municipal Bonds
Posted on February 12th, 2009 by Bob Brinker

On Tuesday February 10th Federal Reserve Chairman Ben Bernanke offered the following testimony to the U.S. House Committee on Financial Services. The Federal Open Market Committee (FOMC) is scheduled to meet next on March 17th, 2009. Recently, the federal funds rate has settled into the 0.22 - 0.24 basis points range - just below the 0.25% upper range limit.

Below is the full testimony:

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I appreciate this opportunity to provide a brief review of the Federal Reserve’s various credit programs, including those relying on our emergency authorities under Section 13(3) of the Federal Reserve Act.  I will also discuss the Federal Reserve’s ongoing efforts to inform the Congress and the public about these activities.

Federal Reserve Programs to Strengthen Credit Markets and the Economy
As you know, the past 18 months or so have been extraordinarily challenging for policymakers around the globe, not least for central banks.  The Federal Reserve has responded forcefully to the financial and economic crisis since its emergence in the summer of 2007.  Monetary policy has been especially proactive.  The Federal Open Market Committee (FOMC) began to ease monetary policy in September 2007 and continued to ease in response to a weakening economic outlook.  In December 2008, the Committee set a range of 0 to 25 basis points for the target federal funds rate.

Although the target for the federal funds rate is at its effective floor, the Federal Reserve has employed at least three types of additional tools to improve the functioning of credit markets, ease financial conditions, and support economic activity. 

The first set of tools is closely tied to the central bank’s traditional role of providing short-term liquidity to sound financial institutions.  Over the course of the crisis, the Fed has taken a number of extraordinary actions, including the creation of a number of new facilities for auctioning short-term credit, to ensure that financial institutions have adequate access to liquidity.  In fulfilling its traditional lending function, the Federal Reserve enhances the stability of our financial system, increases the willingness of financial institutions to extend credit, and helps to ease conditions in interbank lending markets, reducing the overall cost of capital to banks.  In addition, some interest rates, including the rates on some adjustable-rate mortgages, are tied contractually to key interbank rates, such as the London interbank offered rate (Libor).  To the extent that the provision of ample liquidity to banks reduces Libor, other borrowers will also see their payments decline.

Because interbank markets are global in scope, the Federal Reserve has also approved bilateral currency liquidity agreements with 14 foreign central banks.  These so-called swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that the foreign central banks may lend to financial institutions in their jurisdictions.  The purpose of these liquidity swaps is to ease conditions in dollar funding markets globally.  Improvements in global interbank markets, in turn, promote greater stability in other markets at home and abroad, such as money markets and foreign exchange markets.

The provision of short-term credit to financial institutions exposes the Federal Reserve to minimal credit risk, as the loans we make to financial institutions are generally short-term, overcollateralized, and made with recourse to the borrowing firm.  In the case of the currency swaps, the foreign central banks are responsible for repaying the Federal Reserve, not the financial institutions that ultimately receive the funds, and the Fed receives an equivalent amount of foreign currency in exchange for the dollars it provides foreign central banks.

Although the provision of ample liquidity by the central bank to financial institutions is a time-tested approach to reducing financial strains, it is no panacea.  Today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, notwithstanding the access of these firms to central bank liquidity.  Moreover, providing liquidity to financial institutions does not directly address instability or declining credit availability in critical nonbank markets, such as the commercial paper market or the market for asset-backed securities.

To address these issues, the Federal Reserve has developed a second set of policy tools which involve the provision of liquidity directly to borrowers and investors in key credit markets.  For example, we have introduced facilities to purchase highly rated commercial paper at a term of three months and to provide backup liquidity for money market mutual funds.  In addition, the Federal Reserve and the Treasury have jointly announced a facility–expected to be operational shortly–that will lend against AAA-rated asset-backed securities collateralized by recently originated student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.  Unlike our other lending programs, this facility combines Federal Reserve liquidity with capital provided by the Treasury.  If the program works as planned, it should help to restart activity in these key securitization markets and lead to lower borrowing rates and improved access in the markets for consumer and small business credit.  This basic framework could also be expanded to accommodate higher volumes as well as additional classes of securities, as circumstances warrant.

These special lending programs have been set up to minimize credit risk to the Federal Reserve.  The largest program, the commercial paper funding facility, accepts only the most highly rated paper.  It also charges borrowers a premium, which is set aside against possible losses.  As just noted, the facility that will lend against securities backed by consumer and small-business loans is a joint Federal Reserve-Treasury program; capital provided by the Treasury from the Troubled Asset Relief Program will help insulate the Federal Reserve from credit losses (and the Treasury will receive most of the upside from these loans).

The Federal Reserve’s third set of policy tools for supporting the functioning of credit markets involves the purchase of longer-term securities for the Fed’s portfolio.  For example, we recently announced plans to purchase up to $100 billion of the debt of government-sponsored enterprises (GSEs), including Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, and up to $500 billion in agency-guaranteed mortgage-backed securities (MBS) by midyear.  The objective of these purchases is to lower mortgage rates, thereby supporting housing activity and the broader economy.

The Federal Reserve is engaged in an ongoing assessment of the effectiveness of its credit-related tools.  Measuring the impact of our programs is complicated by the fact that multiple factors affect market conditions.  Nevertheless, we have been encouraged by the responses to these programs, including the reports and evaluations offered by market participants and analysts.  Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets.  For example, we believe that the aggressive liquidity provision by the Fed and other central banks has contributed to the recent declines in Libor and is a principal reason that liquidity pressures around the end of the year–often a period of heightened liquidity strains–were relatively modest.  There is widespread agreement that our commercial paper funding facility has helped to stabilize the commercial paper market, lowering rates significantly and allowing firms access to financing at terms longer than a few days.  Together with other government programs, our actions to stabilize the money market mutual fund industry have also shown some measure of success, as the sharp withdrawals from funds seen in September have given way to modest inflows.  And our purchases of agency debt and MBS seem to have had a significant effect on conforming mortgage rates, with rates on 30-year fixed-rate mortgages falling close to a percentage point since the announcement of the program.  All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened.

We evaluate existing and prospective programs based on the answers to three questions:  First, has normal functioning in the credit market in question been severely disrupted by the crisis?  Second, does the Federal Reserve have tools that are likely to lead to significant improvement in function and credit availability in that market, and are the Federal Reserve’s tools the most effective methods, either alone or in combination with those of other agencies, to address the disruption?  And third, do improved conditions in the particular market have the potential to make a significant difference for the overall economy?  To illustrate, our purchases of agency debt and MBS meet all three criteria:  The mortgage market is significantly impaired, the Fed’s authority to purchase agency securities gives us a straightforward tool to try to reduce the extent of that impairment, and the health of the housing market bears directly and importantly on the performance of the broader economy.

The Use of Authorities Under Section 13(3) of the Federal Reserve Act
Section 13(3) of the Federal Reserve Act authorizes the Federal Reserve Board to make secured loans to individuals, partnerships, or corporations in “unusual and exigent circumstances” and when the borrower is “unable to secure adequate credit accommodations from other banking institutions.”  This authority, added to the Federal Reserve Act in 1932, was intended to give the Federal Reserve the flexibility to respond to emergency conditions.  Prior to 2008, credit had not been extended under this authority since the 1930s.¹  However, responding to the extraordinarily stressed conditions in financial markets, the Board has used this authority on a number of occasions over the past year.

Following the Bear Stearns episode in March 2008, the Federal Reserve Board invoked Section 13(3) to make primary securities dealers, as well as banks, eligible to borrow on a short-term basis from the Fed.²  This decision was taken in support of financial stability, during a period in which the investment banks and other dealers faced intense liquidity pressures.³  The Fed has also made use of the Section 13(3) authority in its programs to support the functioning of key credit markets, including the commercial paper market and the market for asset-backed securities.  In my view, the use of Section 13(3) in these contexts is well justified in light of the breakdowns of these critical markets and the serious implications of those breakdowns for the health of the broader economy.  As financial conditions improve and circumstances are no longer “unusual and exigent,” the programs authorized under Section 13(3) will be wound down, as required by law.  Other components of the Federal Reserve’s credit programs, including our lending to depository institutions, liquidity swaps with other central banks, and purchases of agency securities, make no use of the powers conferred by Section 13(3).

In a distinct set of activities, the Federal Reserve has also used its Section 13(3) authority to support government efforts to stabilize systemically critical financial institutions.  The Federal Reserve collaborated with the Treasury to facilitate the acquisition of Bear Stearns by JPMorgan Chase & Co. and to prevent the failure of the American International Group (AIG), and we worked closely with the Treasury and the Federal Deposit Insurance Corporation to help to stabilize Citigroup and the Bank of America.  In the cases of Bear Stearns and AIG, as part of a strategy to avoid impending defaults by the companies, the Federal Reserve made loans against pools of collateral.

Activities to stabilize systemically important institutions seem to me to be quite different in character from the use of Section 13(3) authority to support the repair of credit markets.  The actions that the Federal Reserve and the Treasury have taken to stabilize systemically critical firms were essential to protect the financial system as a whole, and, in particular, the financial risks inherent in the credits extended by the Federal Reserve were, in my view, greatly outweighed by the risks that would have been faced by the financial system and the economy had we not stepped in.  However, many of these actions might not have been necessary in the first place had there been in place a comprehensive resolution regime aimed at avoiding the disorderly failure of systemically critical financial institutions.  The Federal Reserve believes that the development of a robust resolution regime should be a top legislative priority.  If the specification of this regime were to include clear expectations of the Federal Reserve’s role in stabilizing or resolving systemically important firms–a step we very much support–then the contingencies in which the Fed might need to invoke emergency authorities could be tightly circumscribed.   

Transparency and Disclosure
I would like to conclude by discussing the Federal Reserve’s ongoing efforts to inform the Congress and the public about its various lending programs.

I firmly believe that central banks should be as transparent as possible, both for reasons of democratic accountability and because many of our policies are likely to be more effective if they are well understood by the markets and the public.  During my time at the Federal Reserve, the FOMC has taken important steps to increase the transparency of monetary policy, such as moving up the publication of the minutes of policy meetings and adopting the practice of providing longer-term projections of the evolution of the economy on a quarterly basis.  Likewise, the Federal Reserve is committed to keeping the Congress and the public informed about its lending programs and balance sheet.  For example, we continue to add to the information shown in the Fed’s H.4.1 release, which provides weekly detail on the balance sheet and the amounts outstanding for each of the Federal Reserve’s lending facilities.  Extensive additional information about each of the Federal Reserve’s lending programs is available online, as shown in the appendix to this testimony.  Pursuant to a requirement included in the Emergency Economic Stabilization Act passed in October, the Fed also provides monthly reports to the Congress on each of its programs that rely on the Section 13(3) authorities.  Generally, the Fed’s disclosure policies are consistent with the current best practices of major central banks around the world.

That said, recent developments have understandably led to a substantial increase in the public’s interest in the Fed’s balance sheet and programs.  For this reason, we at the Fed have begun a thorough review of our disclosure policies and the effectiveness of our communication.  Today I would like to mention two initiatives.

First, to improve public access to information concerning Fed policies and programs, Federal Reserve staff are developing a new website that will bring together in a systematic and comprehensive way the full range of information that the Federal Reserve already makes available, supplemented by new explanations, discussions, and analyses.  Our goal is to have this website operational within a few weeks.

Second, at my request, Board Vice Chairman Donald Kohn has agreed to lead a committee that will review our current publications and disclosure policies relating to the Fed’s balance sheet and lending policies.  The presumption of the committee will be that the public has a right to know, and that the nondisclosure of information must be affirmatively justified by clearly articulated criteria for confidentiality, based on factors such as reasonable claims to privacy, the confidentiality of supervisory information, and the effectiveness of policy.

Thank you.  I will be pleased to respond to your questions.

Filed under: Federal Reserve, General
Posted on February 11th, 2009 by Bob Brinker