Tags: Fed | Mortgage | Bond | Purchases

Fed Mortgage-Bond Purchases Wreak Havoc in Market

By    |   Tuesday, 10 Aug 2010 08:49 AM

The Federal Reserve’s $1.25 trillion buying spree of mortgage bonds may have been vital in repairing the financial system, but it’s caused trouble in the bond market.

That’s because the Fed has sucked up about 25 percent of the government-backed mortgage bond market, creating a shortage of the paper, Bloomberg reports.

That in turn has made it difficult for dealers to complete their trades.

The amount of mortgage bonds that dealers failed to deliver or receive totaled $1.34 trillion in the week ended July 21, almost nine times the weekly average of $150 billion in the five years through 2009, according to Fed data.

That can lead to a vicious cycle of trades not being completed, as dealers who enter into an agreement to buy mortgage bonds may have a separate agreement to later sell the bonds.

“You’re adding systemic risk into the market,” Thomas Wipf, head of institutional-securities group financing at Morgan Stanley, told Bloomberg.

“Investors are taking on counterparty risk in trades they didn’t intend to take on. You’re adding systemic risk into the market.”

The Fed’s mortgage bond purchases came as part of its “quantitative easing” program, which also included buying Treasury bonds.

And more of it may be on the way if the economy tanks.

"A better policy response to a negative (economic) shock is to expand the quantitative easing program through the purchase of Treasury securities," St. Louis Fed President Bullard said in a recent speech.

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The Federal Reserve s $1.25 trillion buying spree of mortgage bonds may have been vital in repairing the financial system, but it s caused trouble in the bond market. That s because the Fed has sucked up about 25 percent of the government-backed mortgage bond market,...
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Tuesday, 10 Aug 2010 08:49 AM
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