SUGGESTION TO THE FEDERAL RESERVE CHAIRMAN BEN BERNANKE

SUGGESTION TO THE FEDERAL RESERVE CHAIRMAN BEN BERNANKE

To:               The Right Honorable Federal Reserve Chairman Ben Bernanke

From:           Athinarayanan Sanjeevraja

Date:            08.11.2011

RE:               Large Scale Asset Purchase Programme (Mortgage Backed securities)

Suggestion:    At least targeting the long end of the yield curve while purchasing MBS

Good Morning Chairman.  Bloomberg reported that Federal Reserve plan to buy a mortgage backed securities to ail the U.S. housing market. If I am not mistaken, In late 2008, Federal Reserve intention in buying Large Scale Asset Purchases in an effort to hold down the level of long term interest rates to increase the availability of credit for businesses and households. As a result, still unemployment is very high level, corporate America earnings are still fragile. I agreed that Large scale asset Purchase improved liquidity conditions in the market, increase the turnover volume, diminish the new issuance premium on corporate bonds but it constricted bid-ask spreads and the spread between treasury yields and OIS rates. I also observed that when Federal Reserve initial announcement its Treasury debt purchase programme, yields have declined. While Federal Reserve completed its Treasury debt purchase, yields have risen. Based on this evidence, I conclude that the expiration of the any asset purchase programme has so far had only a limited effect on credit costs. At the end of the asset purchase programme market in advance while the velocity of purchases also diminished over time.

Bloomberg reported that again Federal Reserve plan to buy Mortgage-backed Securities (MBS) to ails the U.S. housing market. I agreed that the MBS purchase programme has successfully contributed to the reduction in mortgage interest rates. At the same time MBS purchases have also affect the mortgage interest spreads especially prepayment risks which is impact the yields on MBS because most of the mortgages entail a prepayment option. You can control for the prepayment risk in the basic mortgages by considering the effect of MBS purchase programme on the swap-option adjusted spread. But the swap option adjusted spread is the yield spread of the MBS over a term structure of substitute interest rates after controlling for the value of the prepayment option. So I conclude that controlling for prepayment risks proposed the MBS purchase programme had a little impact. In fact it is likely to be some upward pressure on MBS rates as market conditions normalized. For instance, the lack of alternative available credit related assets, an expansion in banks securities book and limited net new mortgage supply. I think that unwind of Federal Reserve holdings could trigger a more pronounced rise in credit costs, although such actions appear improbable in the immediate future. But it will.

Let me conclude it, Federal Reserve plan to purchase MBS will not cure all that trouble the housing market. Still Federal Reserve want to repurchase MBS, it should strive to ensure that decline at the long end of the yield curve. In addition, The American President refinancing plan (HARP) isn’t really decisive decision. The health of the global economy will depend on the sustained recovery in the U.S. economy. Will this MBS purchase programme is intend to support?

Thank you very much for letting me states my opinion.

I am Athinarayanan Sanjeevraja with great respect of Federal Reserve Chairman Ben Bernanke.

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