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Credit Suisse Sees Strong Investor Demand as Fed Exits MBS

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As the Fed's forthcoming exit from agency mortgage securities looms overhead for uncertain investors, researchers from global financial services firm Credit Suisse are looking ahead to an expected strength of bank and foreign investor demand in 2010. The Fed is considering extending and expanding asset-purchase programs, including the MBS program, if its exit this quarter is not replaced with private investor demand, causing MBS spreads to treasuries to blow out again. Despite uncertainty in the industry over what awaits the agency MBS market after the Fed exits MBS, plans continue for winding down not only the purchases, also but the large volume of reserves and MBS held by the federal banking system. The extension may prove unnecessary as foreign investor appetite for agency MBS appears stronger than previously thought, according to commentary from Credit Suisse, provided to HousingWire. For example, $752bn of agency MBS held by foreign investors as of June 30, 2009 "bodes well" for the market in 2010, researchers said, as this indicates foreign investors likely did not only sell MBS during the crisis, but also continued to reinvest paydowns. Additionally, Credit Suisse said, these investors are likely to continue buying after the Fed's exit. Banks' demand for agency MBS should remain "strong" later this year, as the top 50 banks increased their agency MBS holdings by a total $108bn - or 17% - during 2009, according to Credit Suisse. Liquidity is rising at these banks as loan demand remains weak and the production of agency MBS increases: "We estimate that the growth in Agency MBS holdings should continue at a similar rate in 2010 given the continued increase in excess liquidity," researchers wrote. In the meantime, the New York Federal Reserve Bank bought another $10bn of agency mortgage-backed securities (MBS) in the week ending March 3. It marks yet another weekly slowdown from the $11bn bought the previous week. It bought $3.6bn of Freddie Mac (FRE) MBS, $6.3bn of Fannie Mae (FNM) MBS and $100m of Ginnie Mae MBS, according to updated weekly figures. The weekly purchases bring total net purchases to almost $1.22trn - or 97% of the Fed's $1.25trn purchasing power under the program. The Fed has $34bn left to spend under the program, which it expects to wind-down by the end of March. With more than three weeks of wind-down time left in the month, the Fed looks ready to meet its goal at the current pace of purchases. The Federal Reserve's balance sheet slipped by nearly $7bn in the same week to $2.26trn. The balance is $371bn over the same week last year, as the Fed still holds more than $1trn of MBS. Write to Diana Golobay. Disclosure: The author holds no relevant investment positions.

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