This is probably further off now than it was just a few weeks ago, but it is still an important debate to have. What impact will The Federal Reserve’s balance sheet trimming have on the Mortgage Backer Security market? Kate Duguid and Colby Smith explore this debate at The Financial Times…
Investors are undoubtedly concerned. Lofti Karoui, chief credit strategist at Goldman Sachs, told The Financial Times, “In a world where the Fed doesn’t buy anything, private investors will have to absorb a significantly higher amount of supply than last year,” So what doe that mean? Higher prices…
- “The shock of supply is likely to drive prices lower. Prices have already fallen…The spread of agency MBS over Treasuries — the premium investors demand to hold the riskier mortgage bonds over risk-free Treasuries — has risen from 0.02 percentage points at the beginning of November, to 0.32 percentage points today, the highest level in more than a year.”
However, not all investors are worried. Daniel Hyman, head of agency MBS portfolio management at Pimco told the Financial Times, “If the Fed decides to sell it is a definitive negative, but it is only one factor…” This is true especially if the housing market reverts back to more normal volume levels…
- “…annual issuance in the agency MBS market averaged about $1.6tn in the 20 years prior to the pandemic, versus $4tn in 2021. If issuance this year returns to more normal levels, that could offset any effects of Fed tightening.”
REMINDER: Sam Khater, Freddie Mac’s Chief Economist projected that purchases originations would actually climb in 2022 to $2.1 trillion. However, refinance activity is expected to decline 55% to $1.2 trillion in 2022.