Nearly ten years ago, the Federal Reserve (Fed) embarked upon what became known as quantitative easing as a way to combat the financial crisis of 2008. With the Fed Funds rate near zero percent, the Fed announced it would purchase U.S. Treasury notes and mortgage-backed securities. After three rounds of quantitative easing, the Fed ended its purchases in late 2014. During that time, the Fed has purchased nearly $1.78 trillion of agency mortgage-backed securities (MBS).
The purchase program by the Fed kept interest rates low and allowed the housing market to slowly recover. In addition, the new demand from the Fed reduced the cost of mortgage debt, which spurred banks to extend loans to consumers. As can be seen in this week’s chart above, during the Fed’s purchase program, the relative spread of agency mortgages to U.S. Treasuries declined. Currently, agency mortgage spreads remain below historical averages. The Fed’s purchase program helped keep rates low and spreads tight, thereby making agency mortgages a less attractive fixed income option in recent years.
Last week, the Fed announced their plans to reduce its holdings of agency MBS by $4 billion per month which will reset quarterly until it reaches $20 billion a month. The reduction will occur through maturities rather than active selling. While largely anticipated, it remains unclear who will be the next incremental buyer of agency mortgages.
Key Takeaway:The Fed owns nearly one-third of the agency mortgage market. As the biggest buyer leaves the market, there may be less demand for agency MBS. While mortgage rates have recently begun to rise as the Fed has slowly increased short-term borrowing costs, volatility remains low. Perhaps this will change and lead to increased opportunities as the agency mortgage market tries to absorb the extra supply as the Fed steps away.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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