1. FED

1) Fed in Banks’ Wheelhouse May Fuel Bond Shift, Deutsche Bank Says

The Federal Reserve’s decision to resume purchases of government-backed mortgage securities may help push banks to expand the types of bonds they buy, according to Deutsche Bank AG. By lowering mortgage-bond yields, the Fed’s plan to reinvest proceeds from the $1 trillion of housing debt it holds into new home-loan securities may fuel buying of riskier debt with higher yields.

“It’s hard to say that there’s some huge ‘student body left’ movement to suddenly jump into credit risk, but there’s certainly more anecdotal evidence it’s happening,” Abrahams, Deutsche Bank’s New York-based securitization-research head said.

Abrahams noted Fed policy makers had been signaling they wanted to rid the central bank’s balance sheet of its unconventional mortgage-bond holdings as quickly as possible. He also joins analysts at Credit Suisse Group AG and CRT Capital Group LLC in saying the Fed may have decided to switch tactics to push banks to lend.

2) Fed’s Hoenig Says Operation Twist Risks New ‘Complexities’

Federal Reserve Bank of Kansas City President Thomas Hoenig said the Fed’s plan to push down long- term interest rates may produce accidental outcomes and policy makers risk creating “imbalances” in the economy.

2. Euro zone Crises

1) EU Split Over Push for Bigger Bank Haircut in Greek Rescue

The European Commission is resisting a push to impose bigger writedowns on banks’ holdings of Greek government debt than those agreed on at a July 21 summit, a European official said.

The German Finance Ministry said it wasn’t “putting pressure on anybody” over haircuts after Chancellor Angela Merkel signaled in an interview with Greek television broadcast today that policy makers may review Greece’s second bailout depending on the results of an international progress report.

2) Germany to Vote on Euro Rescue Fund, Set Stage for Next Steps

German lawmakers are set to back an expansion of the euro-area rescue fund’s firepower as European officials turn to look at what next steps may be needed to stem the debt crisis.

The plan before the lower house in Berlin today would allow the fund to buy bonds of distressed states and offer emergency loans to governments, raising Germany’s guarantees to 211 billion euros ($287 billion) from 123 billion euros. The main opposition Social Democrats and Greens have said they will vote with Chancellor Angela Merkel’s government, assuring passage.

European and International Monetary Fund officials return to Greece today to try put in place a package that will help the country stave off default.

Analyst Comment: The German parliament is voting for too little, too late. Merkel can’t possibly believe this is the final point in a rescue package that will calm global markets and lead us out of the crisis.

3) Spain Suspends Lottery Share Sale That Aimed to Trim Bond Sales

Spain suspended the initial public offering of its lottery operator because of market conditions, depriving the deficit-laden nation of revenue to reduce this year’s bond issuance.

The banks “recommended a price range that had that value in the middle of the range, so there was a risk that the final price would have been below that book value,” Finance Minister Elena Salgado said in an interview last night with radio station Cadena Ser. “We didn’t want to run that risk.”

4) Portugal Fails to Curve Bond Yields Like Ireland: Euro Credit

Portugal has been trying to convince investors for months that it’s not Greece. The nation’s yield curve indicates it’s not Ireland either.

Portuguese two-, five- and 10-year bond yields have climbed since the end of June, while Irish rates fell. The country’s two-year securities now yield 6.5 percentage points more than its 10-year debt, about twice the rate of three months ago.

Analyst Comment: Ireland is a darling of the market. Its economy is doing well. My sense is that the market will come to terms with Portugal and I suspect its yields will come down with the 2012 budget discussion.

5) Euro Area’s Rescue Options Are Shrinking Fast: Anil K Kashyap

-- There is wide agreement that the status quo is unsustainable, and no one is optimistic about the future. The elevated cost of borrowing for banks and some governments must be addressed within weeks or at most a couple of months.

-- The euro area needs more integration and cooperation or it will dissolve.

-- The prescription for what needs to be done has evolved in recent months. Many outside experts long believed that the largest European banks were seriously undercapitalized. The core of the problem was the high levels of sovereign debt that had not been marked to market that are held by banks in many countries.