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Who's the Sucker When Treasury Winds Down Its Mortgage Backed Securities?


As the Treasury starts to sell its remaining $142 billion in MBS, we'll be able to gauge the market's appetite for such holdings.


I recently came across this post written by the Angry Bond Bear at the Stone Street Advisors blog. The US government has been the biggest buyer of mortgage backed securities through its variety of agencies and purchase programs, and now it appears the government wants to unload some of its holdings. From the press release:

WASHINGTON – Today, the U.S. Department of the Treasury announced that it will begin the orderly wind down of its remaining portfolio of $142 billion in agency-guaranteed mortgage-backed securities (MBS). Starting this month, Treasury plans to sell up to $10 billion in agency-guaranteed MBS per month, subject to market conditions.

"We're continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort," said Mary J. Miller, Assistant Secretary for Financial Markets. "We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market."

Let's put this in some context: most of the MBS bought has been done so by the Fed. That has been public and vocal. They have a huge balance sheet now as a result of their purchases and have left many to wonder if/how/when the Fed will shrink its balance sheet and get it back to pre-credit crunch levels.

But the Treasury had also been buying agency MBS as well. In fact, the announcement to wind down the portfolio of $142 billion is a real test to me because we'll gauge the market's appetite for taking back a whole bunch of securities they were only too happy to dump off a couple of years ago. A little more context: the Treasury's peak portfolio size was $192 billion in December 2009. So while the portfolio is smaller now than it was before, there's still a long way to go before even the Treasury gets out of this commitment.

And that has left me wondering about the words of some good friends of mine:

Knowing that the Treasury is going to try and offload $10 billion in MBS a month while housing is still falling in value means that the mortgages are most likely being held on assets that are declining in value: a losing proposition each and every time. So thinking about that fact, along with the amount of mortgages that need to be sold back on the market along with that prescient rule, makes me think only one thing:

We're the suckers.

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