### POV: The Fed's tapering of its buying....>

US MBS: ### POV: The Fed's tapering of its buying of US Treasuries and MBS has

begun, but Treasuries and MBS mkts are calm so far, hardly noticing taper. But

that could change especially in MBS where Fed generally buys at least 25% of

available MBS supply each day, and traders organize whole days around Fed MBS

buying. Less demand from a price-insensitive MBS buyer is a serious matter,

especially as MBS spreads now are at roughly 5-year tight levels, thus

overbought. 

- That picture may look even more serious by April-June 2018, when the Fed's

reductions in its buying pace (see upcoming taper table) will increase in size,

and truly begin to bite, in MBS. Recall Fed holds $4.2 Tln in MBS and Tsys on

its Balance Sheet, bought to soften Great Fincl Crisis.

- Traders warn negative factors will come together in about 6 months to MBS:

higher US Treasuries supply next year/thus higher Tsy ylds; that means more MBS

duration exposure, which has to be hedged by selling Tsys. Meanwhile there will

be less Fed MBS buying, and less ECB bond buying too (ECB is expected to halve

its current EU60B/mo pace down to EU30B/mo in Jan2018). (More)