Even with the housing market showing signs of life, all eyes are on the Federal Reserve as the central bank continues to grapple with economic weakness from the eurozone as well as anemic job growth numbers in the U.S.
As for whether another round of quantitative easing will actually help, analysts remain uncertain and divided into different camps.
“We doubt a third round of quantitative easing from the Fed would wet investor appetite for risk,” analysts with Capital Economics said in a new report. “After all, the U.S. profit cycle may be turning a corner, the global economy is slowing and the eurozone crisis is escalating.”
The Capital Economics analysts do not expect a strong economic recovery in 2013 and only foresee a modest pick up in the global economy during 2014.
Steven Abrahams, a structured finance analyst at Deutsche Bank (DB), said a “Fed bid for MBS should help securities prices, of course, with the amount an educated guess.”
In fact, he says, the first round of quantitative easing, which involved the Fed buying $1.25 trillion in mortgage-backed securities from January 2009 through March 2010, tightened option adjusted spreads around par by roughly 30-basis points, according to data from Johannes Stroebel and John Taylor at Stanford University.
“Other Fed work has suggested a bigger impact, but most of that work focused on nominal mortgage rates rather than spread,” Abrahams said. “When the Fed announced last Sept. 20 that it would reinvest portfolio MBS and agency debt principal back into MBS, option-adjusted spreads tightened by roughly 25 basis points. That reinvestment took, at the time, an estimated $200 billion in MBS out of the market that would have otherwise prepaid out of the Fed’s portfolio between September last year and the end of June.”
Abrahams also warns that the Fed could end up hurting MBS liquidity since it already owns over 40% of outstanding Fannie Mae and Freddie Mac 30-year, 4.5% pass-throughs; more than 30% of 3.5%’s; and more than 25% of 4.0% pass-throughs.
“These are concentrations that trigger a slowdown in Fed purchases of Treasury debt where it owns a large share of the issue,” he wrote. “It looks like it has more room to work in Ginnie Mae. More MBS in Fed hands, of course, also pushes some private capital to the sidelines. The rapid concentration of MBS holdings in recent years may mean that the impact is neither temporary nor benign.”
