Deutsche Bank: Possible MBS Sell Off May Hurt Treasury Yields
The Fed's move to begin buying long-term Treasuries with proceeds from maturing mortgage-backed securities opens up the possibility of quantitative easing if the economy declines further, according to Deutsche Bank. In its recent sector analysis, Deutsche Bank said the current 30-year Treasury yields are above the 30-year coupon MBS rate, which "hasn’t happened before to the same degree," and this leaves Treasury yields "vulnerable in the near term to an MBS-driven sell-off." Analysts said last week's Fed announcement led to a "fairly moderate" rally in yields. But the bond market already had been pricing a weaker economy than the Fed’s forecast for nearly a month and last week's actions confirmed the Fed also is lowering its outlook on the US economic recovery, according to Deutsche Bank. Analysts expect the US economy to continue to be dragged down by global declines in credit, such as "the instability of interbank funding, the continued workout of impaired assets, and the uncertainties of financial regulation." Deutsche Bank also said the Japanese yen appreciation rate against the US dollar is at a 15-year high, which could trigger intervention by the Bank of Japan if the trend continues. Intervention by the bank could lead to increased Japanese buying of US Treasuries, according to analysts. And competition for the dollar "could trigger another rally in the US Treasury intermediate sector." Analysts said a sell-off in rates driven by the mortgage market is possible in the near term, as any new MBS will be competing with longer-term Treasuries. The Treasuries may also become more attractive to investors now that the Fed won't be replacing maturing MBS with new MBS. Write to Jason Philyaw.