Will the Fed Begin Selling MBS in the Near Term Future?

CNBC "broke news" this morning that 6 of 10 FOMC members allegedly believe it would be wise to begin selling their mortgage holdings....in the "near term".

First of all we've heard this RUMOR before and we'll probably hear it again. Unfortunately it didn't make much sense then and doesn't make much sense now. 

Remember the Fed owns mostly production mortgages....81.5% of their portfolio is 30yr 4.0 coupons,4.5 coupons, and 5.0 coupons. Thinking strictly from a capitalistic perspective, if the Fed decided to sell they would drastically erode the value of their own holdings. Besides eroding their own returns, selling "in the near term" would create an uncomfortable supply/demand dislocation in the MBS market. Something the Fed worked hard to keep in check from January 2009 to March 2010.

 Nothing about selling their holdings, BESIDES POLITICS, makes any sense.

WHY WOULD THE FED WANT TO PUT MORE PRESSURE ON THE HOUSING MARKET WHEN IT IS JUST STARTING TO STABILIZE????

Don't forget how much the Fed is making on their MBS holdings: AN "UNUSUALLY" LARGE AMOUNT

When might the Fed start off-loading their holdings?

After the fate of the GSEs becomes more clear and the housing finance system  is stable enough to support the influx of MBS supply. None of this can occur until the status of the economic recovery is CERTAIN...as opposed to the guessing game that it is now.

CNBC broke wind this AM...not news

The 3.625% coupon bearing 10 year TSY note is -0-10 at 98-15 yielding 3.811%. Not much to report in 10s. The 2s/10s curve is unchanged at 274bps and rates have been sideways in a tight range since the open...

"Rate sheet influential" mortgages aren't doing so bad though....all things considered. The FN 4.5 is -0-01 at 100-06 yielding 4.484%. The secondary market current coupon is 4.48%.  The CC yield is 67.1 basis points over the 10yr TSY note and 67.5bps over the 10yr interest rate swap.  The current coupon, which is the MBS yield lenders base mortgage rates on after gfees and servicing, is 4bps tighter to the spot yield curve today. The current coupon yield is at its tightest levels of the day vs benchmarks thanks to lower dollar prices and a lack of new loan supply. We thought this might happen today. Real money loves when 4.5s drop below 100-00.

This is good! It proves that investors still think mortgages are a "BUY", especially when they cheapen up relative to TSYs and swaps. READ THE AM post for a better explanation.

Unfortunately the positives we can take from tighter MBS yield spreads (outperforming benchmarks) are not enough to warrant a Friday afternoon reprice for the better from lenders. Even if TSYs rally.