analysts expect continued spread volatility in mortgage-backed securities although the Fed backstop should contain any basis widening.
In this week's mortgage market focus report, the financial-services company said wider spreads or higher paydowns may prompt the Fed to reverse course and reinvest proceeds back into MBS. The higher paydowns could open up MBS supply to the rest of the market, which in turn could lead to wider spreads, analysts said.
"However, the Fed is likely to exercise caution in reinvesting in this scenario to avoid an excessive tightening of the basis, which could be disruptive to the market," Credit Suisse analysts Mukul Chhabra, Qumber Hassan and Mahesh Swaminathan said in the report.
And while the Fed wants to stimulate the economy, the last thing officials want is to be seen as disruptive to the market.
"If basis widening dampens paydown increases by tempering mortgage rate declines, the Fed could still switch some reinvestment into MBS. However, the bar in this case would be higher (significant basis widening) because today’s rationale for favoring Treasurys would still hold," the analysts said.
When the Federal Reserve announced plans
to begin putting proceeds from maturing mortgage-backed securities into Treasurys, Credit Suisse said it expects $97 billion to be available for reinvestment during the rest of the year with another $224 billion available next year.
Write to Jason Philyaw