US mortgage sector braced for end of Fed help

Michael Mackenzie:

Cold turkey time is rapidly approaching for the US mortgage market as the Federal Reserve gets ready to end its mammoth $1,250bn buying programme at the end of March.

The prospect of such a large buyer moving to the sidelines means that the "artificial market" created by the Fed's hefty purchases - part of a monetary policy strategy aimed at reducing mortgage borrowing costs - should result in more normal mortgage rates, likely to be at a higher level.

The question is, how much higher? There is a great deal of uncertainty among many investors on exactly how to position themselves for the withdrawal of the Fed from the mortgage market. Many want higher rates, as it makes the investments more attractive. Yet the Fed wants to keep mortgage rates low to help home-buyers.

In a survey of some of the 4,000 people attending a securitisation conference this week, 73 per cent of respondents expected spreads on mortgage-backed securities to go "much wider" when the Fed ceases buying mortgage bonds, backed by mortgage agencies Fannie Mae and Freddie Mac. But the impact is hard to pin down.