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Agency MBS market will be shrinking rapidly – Sober Look

This is a syndicated repost published with the permission of Sober Look. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

The chart below shows fixed rate agency MBS issuance since the financial crisis. With the Fed taking out some half of this gross issuance (see post), one would think there should be paper left for other investors, right?

Source: JPMorgan

Wrong. The net (vs. the gross) issuance of fixed rate agency MBS has actually been negative. That’s in part because the GSEs are shrinking their balance sheets. In fact they’ve been told to start shrinking mortgage portfolios by 15% a year (see discussion). The GSEs issue new bonds slower than the old bonds amortize due to mortgage prepayments, producing a negative net.

Source: JPMorgan

As agency bond issuance declines, the Fed purchases are picking up (locking these securities away – probably to maturity). The amount of MBS bonds in the market will begin contracting rapidly going forward.

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