Annaly Capital Management, Inc. (NYSE: NLY) released its third quarter 2012 market commentary providing a review of government policy, the economy and the residential mortgage, commercial mortgage, asset-backed, corporate credit and treasury markets. Through its quarterly commentary Annaly expresses its thoughts and opinions on issues and events it monitors in the financial markets. Please visit our website,
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More than ever, it seems markets and economies around the world are being driven by policymakers. This is a glib statement to make, as regulators, central bankers and legislators have always been the other invisible hand in the functioning of our global economic system. Nevertheless, the third quarter of 2012 provided many stark examples of the ways in which policymakers have stepped up control from their commanding heights.
In particular, September 2012 was a month to remember for watchers of monetary policy. The European Central Bank (ECB) lowered its deposit rate to zero, roiling the European money markets. It also instituted a new program called Outright Monetary Transactions (OMTs) through which the ECB can buy unlimited amounts of EU sovereign bonds on the secondary market, so long as the sovereigns in question submit to certain conditions. The reaction of the markets to this latest pronouncement was similar to prior announcements on programs or summit outcomes—sovereign yields fell, which takes the heat off of fiscal policymakers to address their problems.
Here in the US, the Federal Reserve (Fed) extended its zero interest rate policy through mid-2015, as expected, but it also introduced two previously untried policies. First, the Federal Open Market Committee (FOMC) announced that it intended to expand its holdings of long-term securities with purchases of $40 billion of additional Agency mortgage-backed securities (MBS) per month and “if the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.” This open-ended policy is a shift from its previous Quantitative Easing (QE) practice of announcing a set amount of balance sheet expansion with a defined end date, and has inspired the nickname “QE-infinity”. Second, the FOMC also signaled a subtle policy shift with the following sentence: