Is this the lull before the storm for US mortgages?

What exactly is happening in the bowels of the American mortgage market? That is a question that investors around the world have often asked in the past three years, with a mixture of bafflement and alarm. Now they need to pose it again. For this spring, something of a paradox is hanging over the mortgage-backed securities world. At the end of this month, the US Federal Reserve is due to freeze its program to purchase Fannie and Freddie agency MBS that it implemented in the wake of the financial crisis. Logic might suggest that could potentially deliver a jolt to the market. After all, the reason why the Fed introduced the program in the first place was because the US securitization markets froze during the financial crisis, removing a vital source of funding for the American mortgage world. And thus far, at least, there is still precious little evidence that the securitization market is ready to flourish again. As a result, the degree of assistance that the Fed has provided has been eye-poppingly large: right now it is holding some $1.2trn of MBS, representing about half of its (currently enormously bloated) balance sheet (or about a quarter of the total stock of  high quality outstanding MBS). Yet, notwithstanding those vast numbers, the news that the Fed plans to halt these purchases has not hitherto triggered any sign of panic. On the contrary, the spread between the 30-year Fannie Mae current coupon bond (the sector benchmark) fell to just 57 basis points over Treasuries this week.

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