Market Talk

Treasury Department will begin unloading its $142 billion stash of mortgage-backed securities in an “orderly wind down” beginning this month, which raises an interesting question: Will these sales shed any light on the valuations of MBS that commercial banks are still sitting on?

Banks have not been eager sellers of their inventory of troubled MBS and other non-performing real-estate loans, as bids for the stuff have generally been well below what the banks are willing to accept. And as long as FASB isn’t forcing banks to mark these securities to market, then there’s no strong incentive to sell.

But the Treasury has incentive to sell, noting in its Q&A on the wind-down that its “mission does not typically include managing a large mortgage portfolio.” At least Treasury’s willing to admit it now. The Fed hasn’t yet reached that conclusion.

As of now, Treasury plans to sell $10 billion in MBS per month until it’s all gone, but could suspend sales “if market conditions become less favorable.” Any suspensions or slow pace of sales should offer some gauge on whether bidders continue to low ball, or if Treasury — like banks — is still asking too high a price for the debt.

Treasury says it’ll post its portfolio holdings at the end of each month,  including any sales that were completed, broken down by coupon and agency here.

There are good reasons why MBS rates rose; the Fed’s exit from the market isn’t one of them.

Don’t blame the Fed for this one. Last week, mortgage rates jumped. But that isn’t because the Federal Reserve’s $1.25 trillion program to buy mortgage-backed securities formally ends on Wednesday.

In fact, the difference between mortgage rates and Treasury yields remains near the record low engineered by heavy Fed purchases over the past year. It shows little sign of widening sharply, even as investors prepare for that prop to be removed.

The Fed’s completion of its MBS-buying program has been so well publicized, even “The Situation” knows it’s coming. It isn’t likely to sneak up on or shock anybody. And the Fed has been so slowly whittling down the size of its purchases, the market (it hopes) won’t even notice on Thursday when it’s not in there buying.

It will be interesting, though, to see how things fare further down the risk curve. That $1.25 trillion went somewhere, and you can bet a good slug found its way into the stock market, as well as other asset classes. Now, even though the Fed’s going to be done buying on Wednesday, it won’t be done paying for some time. The central bank itself notes that payments can take up to 180 days, and in its most recent statement, it listed $98 billion yet in commitments it has to pay on. That ain’t chump change. It may not be 180 days; likely it’ll be more a matter or several weeks, possibly dribbling into even June. So there’s some odds that the program may yet yield some liquidity to the marketplace.

But still, this was a big program, and it’s over. The housing market, the stock market, the economy for that matter, they’re losing a big, big buyer. We’ll see how they fare without the support.