Posted on 06/11/2022 1:00:17 PM PDT by Browns Ultra Fan
Alarm!
The CPI news on Friday was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. (Courtesy of Cherry Creek Mortgage)
Despite what Treasury Secretary Janet Yellen has said, Friday’s inflation report demonstrated that inflation is no longer transitory. And with that realization, there was a dearth of bidders for Agency Mortgage-backed Securities (Agency MBS) on Friday.
As a result, agency MBS 2.5% dropped to under $90 as markets expect The Fed to keep raising rates to combat inflation.
Duration of the FNCL 2.5% agency MBS has been extending with growing inflation. Duration was under 1 on August 2, 2021 but is now 7 times greater at almost 7.
Note to Yellen: inflation seems be permanent, not transitory. Or at least inflation will remain high for the foreseeable future, crushing the life out of Agency MBS.
(Excerpt) Read more at confoundedinterest.net ...
Not to worry.
The Fed lied. They will NOT reduce their portfolio of assets.
If these MBS do not sell at the next auction, the Fed will cave and buy them.
The Fed is all talk.
With any rise in interest rates, Fannie and Freddie become insolvent. The government winds up owning all the houses.
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