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Fed's Mortgage Backed Securities exit could lift Treasury yields

Emily Flitter and Julie Haviv – Analysis
Wed Jan 20, 2010 12:08pm ESTRelated NewsMortgage applications rise in first week of 2010
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NEW YORK (Reuters) – The end of the Federal Reserve’s program to buy mortgages backed by Fannie Mae and Freddie Mac could have a ripple effect on the market for U.S. government bonds.

Once the Fed stops buying mortgage-backed securities at the end of March, private buyers will need to step in and take over in a market that the government has propped up since the financial crisis reached its peak. But they won’t want to buy MBS unless the securities offer a better return than the current rate, so mortgage rates will likely rise.

Higher rates could, in turn, spur a hedging practice in the Treasury market that has been largely absent in recent months. As a result, longer-dated U.S. debt could cheapen and yields could climb.

(more from Reuters)

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