Fed may linger in agency MBS market after exit
Now that the US Federal Reserve has nearly finished its massive mortgage bond buying spree, its huge portfolio could be used to tighten credit if and when the economy begins to show real signs of recovery. After plowing billions per week into the $5trn market for mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae since early 2009, the Fed ceases its $1.25trn agency MBS purchase program at the end of March. As overseer of the largest mortgage bond portfolio in the world, the central bank itself has indicated it wants to steer clear of selling agency MBS outright, at least for now. "Selling agency MBS could be a useful tool, but it would also be outright reckless," said Christopher Sebald, chief investment officer at Advantus Capital Management in St. Paul, Minnesota. Unloading its holdings would pressure the sector considerably and de-value the rest of its agency MBS holdings. By sending yields higher, it would negate the purpose of the purchase program, which was to bring down mortgage rates and to stimulate the battered housing sector and the overall economy. Analysts say the Fed will likely initiate passive and active strategies to maneuver its balance sheet and may not sell MBS holdings until 2011, at the earliest. The Fed is seen holding onto its agency MBS portfolio, letting the bonds mature and pay down over time. The bonds, meanwhile, could be exchanged with big US banks for an interim period as a way to pull cash out of the economy.