Getcher MBS Rally Hats Here!

To me, the most significant Fed action today was the decision to roll Agency debenture payoffs into new investments into MBS.  That, in addition to reinvesting all the principal payments on the current portfolio of MBS will probably trim about 5 basis points off the Treasury/MBS basis, IMO.

These last few weeks the Treasury market has been positioning itself for “Operation Twist,” the extension of duration in the Fed’s Treasury portfolio.  That blew our ten-year Note yield right through the 2% yield “barrier” that seemed to be the limit of the anti-European trade.

1.86% yield on the 10-year as I type.  The Long Bond (30 yr) is now yielding just over 3%.

Welcome to 1930’s yields.

Too bad we can’t just take all the “free” money the bond market is offering us, and do something useful with it.


PS My buds on the MBS trading desks tell me that the immediate effect has been a whopping 15 basis points of tightening.  That is most likely due to surprise, and people caught “offsides” by the announcement are scrambling to readjust their hedges.  I don’t expect the full 15 basis point tightening to be there a week from now.


2 Responses to Getcher MBS Rally Hats Here!

  1. BarryZee says:

    Howard, agency mreits were down 3% at the close. What is the cause of that,m with mbs prices up so much?

    • hhill51 says:

      Probably knee-jerk reaction to the tighter spreads going forward. Get ready for the classic whipsaw when the book values scream upward in the Q3 reports, followed by somewhat lower net spreads in Q4 and Q1 next year (until Fed finishes buying). It might even be worth reviewing the Fed’s position in Agency debentures to find any large maturity bulges to gauge how big a gorilla they will be in the new-issue MBS market. That, for me, was the unusual thing in the announcement — that they will redeploy principal from Agency bonds into Agency MBS. If I were managing an amREIT right now, I’d be lining up my secondaries and forward purchases to avoid competing with the Fed. As far as I know, they were big in fixed rate, and not so active in ARMs in QE1, so the amREITs that focus there would feel far less impact.

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