Today Bill Gross of PIMCO, the world’s largest bond manager, questioned who will buy Treasuries in the near future when the government stops its Treasury bond buying (known as quantitative easing or QE2). That’s a harder question to answer until we see that program coming closer to it’s target June 30 end date. But the Fed stopped buying mortgage bonds almost a year ago (March 31, 2010), and while many expected rates to rise as mortgage bonds sold after that, it hasn’t happened and mortgages are about even from that time. As such, rates are also about even since then.
It has to do with the fact that mortgages underwritten in the current strict loan approval environment make good bond pools. Recently the National Information Center released consolidated financial statements for bank holding companies for the 4th quarter. Large banks have been the primary buyers of mortgage-backed securities, and this study looked at the top 50 bank holding companies. In the 3rd quarter they added over $48 billion of agency MBS, and in the 4th quarter added another $38 billion. Most of this was in Fannie/Freddie product; Ginnie Mae pass-through holdings fell by about $1 billion. Most analysts believe that banks should be a leading force in supporting the agency mortgage basis going into 2011. Compare this to banking data released from the FDIC for the fourth quarter, which reported an increase of $42.7 billion in MBS holdings, and $87.4 billion for the year. The demand for agency mortgage-backed securities continues strong, whereas the supply is expected to lessen.
More recent news (the latest H.8 report) shows that large domestic bank holdings of agency MBS have declined by $15.5bn but agency MBS holdings of small banks have increased by $11.5bn since the beginning of the year. This is a continuation of the trend seen from 2010 – in general, smaller banks are providing a relatively stronger demand for agency MBS recently. For instance, agency MBS holdings of large banks rose by 5.3% while those of small banks rose by 18% since the beginning of 2010.