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The real question is: What happens to mortgage rates when the Fed starts to offload their massive MBS holdings in earnest?

JumpCrisscross 4y ago
> What happens to mortgage rates when the Fed starts to offload their massive MBS holdings in earnest? The Fed doesn’t target a run-off number, it targets a rate. That’s why it says it will run off “up to” $35bn per month.
- bequanna 4y ago
  So what if rates stay elevated? They shouldn't/can't keep their balance sheet this bloated forever. The FED currently holds ~2.7T of MBS that they never should have purchased in the first place. That is damn near ~25% of the all outstanding MBS in the US (!). In the short term anything can happen, but longer term there will need to be many investors with a big appetite for MBS to suck up that supply without rates surging higher. Oh yea, these "dumb money" investors will also need to ignore the current all time high valuations and record low home affordability.
naveen99 4y ago
I imagine there are plenty of willing buyers. Fed is making a lot of money on those MBS holdings.
- bequanna 4y ago
  Umm, absolutely not. How are they making money if they bought when rates were ~2-3% and selling when rates are 5-6%? A bond holder LOSES money as interest rates increase and must sell at a DISCOUNT.
  - naveen99 4y ago
    Most were bought after financial crisis, when rates were higher. And they are still selling treasuries under 3%, while collecting probably an average of 5%.
    - bequanna 4y ago
      Huh? Current mortgage rates are the highest they have been since the 08/09 financial crisis. When exactly do you think they were buying 30 year MBS that would yield 5%? At current rates, I would guess the FED has a sizable paper loss on their MBS holdings. Not that it matters tho.
      - naveen99 4y ago
        Before 2010: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US
  - therealdkz 4y ago

JumpCrisscross 4y ago

> What happens to mortgage rates when the Fed starts to offload their massive MBS holdings in earnest? The Fed doesn’t target a run-off number, it targets a rate. That’s why it says it will run off “up to” $35bn per month.

bequanna 4y ago
So what if rates stay elevated? They shouldn't/can't keep their balance sheet this bloated forever. The FED currently holds ~2.7T of MBS that they never should have purchased in the first place. That is damn near ~25% of the all outstanding MBS in the US (!). In the short term anything can happen, but longer term there will need to be many investors with a big appetite for MBS to suck up that supply without rates surging higher. Oh yea, these "dumb money" investors will also need to ignore the current all time high valuations and record low home affordability.

naveen99 4y ago

I imagine there are plenty of willing buyers. Fed is making a lot of money on those MBS holdings.

bequanna 4y ago
Umm, absolutely not. How are they making money if they bought when rates were ~2-3% and selling when rates are 5-6%? A bond holder LOSES money as interest rates increase and must sell at a DISCOUNT.
- naveen99 4y ago
  Most were bought after financial crisis, when rates were higher. And they are still selling treasuries under 3%, while collecting probably an average of 5%.
  - bequanna 4y ago
    Huh? Current mortgage rates are the highest they have been since the 08/09 financial crisis. When exactly do you think they were buying 30 year MBS that would yield 5%? At current rates, I would guess the FED has a sizable paper loss on their MBS holdings. Not that it matters tho.
    - naveen99 4y ago
      Before 2010: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US
- therealdkz 4y ago