Demand for Agency MBS in the Era of the Fed Balance Sheet Unwind

Abstract

Since the Federal Reserve signaled plans to gradually pare down its holdings of Treasuries and agency debt and mortgage-backed securities (MBS) accumulated in the aftermath of the 2008 financial crisis, investors have expressed concern over how the removal of the Fed as an active buyer would impact the government-sponsored enterprise MBS market. In addition, expectations for increased MBS issuance fueled by a strong labor market have added to worries about rising supply in the face of declining demand. It has been more than one year since the Fed began to shrink its balance sheet. This article examines how market conditions over the past year have affected the speed of Fed balance sheet normalization relative to expectations, as well as ongoing developments in the agency MBS market, and finds that feared market imbalances have largely failed to materialize.

TOPICS: MBS and residential mortgage loans, legal and regulatory issues for structured finance