Wednesday, March 17, 2010
"...the degree of assistance that the Fed has provided has been eye-poppingly large: right now it is holding some $1,200bn 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)...Now it is possible that, as the Fed slowly withdraws its assistance, investors will gradually adjust too. But it is equally possible that there could be nasty shocks ahead, particularly if money market or Treasury rates rise. After all, will investors really keep buying MBS instruments if say, Treasury rates shoot up? Have American banks even hedged themselves against the chance of a sudden 1994-style swing in interest rates? What might happen if the US Fed actually starts selling its current holdings of MBS (as opposed to simply refusing to buy any more)? And what is the future of Fannie and Freddie?.."