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VIEW: Goldman: Pace Of Runoff & Possibility Of Active MBS Sales Down the Road

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Goldman Sachs note that “the FOMC is set to start passive balance sheet runoff in May with peak caps of $60bn/month for Treasury securities and $35bn/month for mortgage-backed securities (MBS). We expect that U.S. Tsy runoff will always hit its cap until the balance sheet reaches its terminal size, but MBS runoff will never hit its cap, especially following the very sharp recent rise in mortgage rates.”

  • “Our prepayment projections imply that MBS holdings will decline by just $15bn/month in early 2023. This has very little impact on the balance sheet reduction timeline, but it raises the question of whether the FOMC will find it awkward that U.S. Tsy runoff will be four times faster, when in principle the Committee intends to hold primarily Treasury securities in the longer run.”
  • “Some investors have proposed that the FOMC might eventually sell assets, either to accelerate that relatively slow pace of MBS runoff or to tighten financial conditions more aggressively. We have always assumed that the FOMC will strongly consider selling MBS after the balance sheet reaches its equilibrium size and the goal shifts to tilting the composition toward Treasuries, but the March minutes opened the door to selling before then, once runoff is “well under way.”
  • “Our best guess is that the FOMC will not sell at an earlier horizon. We are most doubtful that the FOMC would sell in order to tighten financial conditions, because Fed officials have a strong preference for using the policy rate as the primary tool for adjusting monetary policy. We also think the FOMC is unlikely to sell because of discomfort with the slow pace of MBS runoff, since mortgage rates have already risen surprisingly sharply, the share of MBS in the portfolio will rise only modestly in the coming years and actually remain well below its level at the end of last cycle, and the principle of not holding MBS in the longer run feels somewhat dated now that asset purchase programs are a standard tool and are likely to include MBS in the future.”
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Goldman Sachs note that “the FOMC is set to start passive balance sheet runoff in May with peak caps of $60bn/month for Treasury securities and $35bn/month for mortgage-backed securities (MBS). We expect that U.S. Tsy runoff will always hit its cap until the balance sheet reaches its terminal size, but MBS runoff will never hit its cap, especially following the very sharp recent rise in mortgage rates.”

  • “Our prepayment projections imply that MBS holdings will decline by just $15bn/month in early 2023. This has very little impact on the balance sheet reduction timeline, but it raises the question of whether the FOMC will find it awkward that U.S. Tsy runoff will be four times faster, when in principle the Committee intends to hold primarily Treasury securities in the longer run.”
  • “Some investors have proposed that the FOMC might eventually sell assets, either to accelerate that relatively slow pace of MBS runoff or to tighten financial conditions more aggressively. We have always assumed that the FOMC will strongly consider selling MBS after the balance sheet reaches its equilibrium size and the goal shifts to tilting the composition toward Treasuries, but the March minutes opened the door to selling before then, once runoff is “well under way.”
  • “Our best guess is that the FOMC will not sell at an earlier horizon. We are most doubtful that the FOMC would sell in order to tighten financial conditions, because Fed officials have a strong preference for using the policy rate as the primary tool for adjusting monetary policy. We also think the FOMC is unlikely to sell because of discomfort with the slow pace of MBS runoff, since mortgage rates have already risen surprisingly sharply, the share of MBS in the portfolio will rise only modestly in the coming years and actually remain well below its level at the end of last cycle, and the principle of not holding MBS in the longer run feels somewhat dated now that asset purchase programs are a standard tool and are likely to include MBS in the future.”