In the broader scope of things, the new supply is a brief shower inside a typhoon of debt that the Treasury and, to a far greater extent, the Federal Reserve—which owns $1.25 billion in MBS—took off the GSE balance sheets during the worst of the credit crisis.
Treasurys’ timing couldn’t have been much worse, considering housing numbers Monday that showed a sharp drop both in price and sales. In its statement announcing the sale, Treasury contends that the purchases were done to stabilize the market. Critics argue, though, that the prolonged intervention only hampered the housing market recovery while bailing out too-big-to-fail institutions that caused the problem.
“To the extent that there’s a market for anything, there is” a market for the MBS about to be sold, says bond trader Kevin Ferry, president of Cronus Futures Management in Chicago. “What you’re seeing is a series of very incremental, very Geithneresque steps towards what is the exit strategy.”
Ferry also questioned why the Fed is maintaining its zero-interest-rate policy on the funds rate even as it is allowing banks to increase dividends and recapitalize while also unloading the MBS. “It just shows that banks still have an inordinate amount of power in the process of how things are going down,” he said.
Still, he expects the Fed do have a fairly efficient go of it when selling the MBS. “There are going to be days when I think it will be a little sketchy,” he said. “I think they’ll get it done, no problem.”
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