CHART SHOCK: Fed's balance sheet grows to record size

After flattening out, it's headed higher once again with QE2.  One question, when the Fed wants to sell MBS and other securities, who's gonna buy?

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(Source -Reuters)   The U.S. Federal Reserve's balance sheet expanded for a sixth straight week, bolstered to a record by purchases of Treasuries, Fed data released on Thursday showed.

The balance sheet, a broad gauge of Fed lending to the financial system, rose to $2.364 trillion in the week ended Dec. 8 from $2.329 trillion the previous week.

Last month, the U.S. central bank began a second bout of quantitative easing, known as QE2. The Fed expects to buy about $600 billion in U.S. government debt purchases over an eight-month period in an effort to stimulate the economy.

The balance sheet exceeded the previous record of $2.333 trillion set in May as the Fed was about to end its initial round of bond purchases that involved $300 billion of Treasuries and $1.425 billion in mortgage-related securities.

The Fed's QE2 follows its use of proceeds from maturing mortgage securities in its portfolio to buy Treasuries -- a move that started in August. Since that time, it has purchased about a combined $175 billion in Treasuries.

The central bank's holdings of U.S. government securities totaled $949.61 billion on Wednesday, up from $917.45 billion last week. 

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Answer this important question Bernanke:

• To whom does the Fed intend to sell its MBS?... 

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Comments

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But not only is Bullard on board with ending the program, he's itching to start selling the MBS. Here's the problem: if there isn't enough investor demand to sustain a private new issue MBS market as it is, then to whom exactly would the Fed sell its MBS? The same problem would persist in the secondary market, unless the Fed is prepared to take deep discounts, which is unlikely, because if anyone can hold assets as long as they like, it's the Fed.

Why am I so convinced that the MBS market is still very unhealthy? Because it told me. Last week at the American Securitization Forum conference, the industry participants answered a poll about when they thought the RMBS market would begin to recover. Their answer:

http://www.theatlantic.com/business/archive/2010/02/to-whom-does-the-fed-intend-to-sell-its-mbs/35646/

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