NEW YORK–With many would-be homebuyers still counting on rates to decline further, bond firm PIMCO said that if the Federal Reserve would shrink its mortgage holdings, it would boost the U.S. housing market.
Since 2022 when it began its rate-hiking campaign, the Fed has shed the mortgage bond holdings on its balance sheet through quantitative tightening, where the central bank allows the principal and interest payments on mortgage-backed securities to roll off without reinvesting those proceeds, noted Reuters in its analysis.
‘Hiding in Plain Sight’
In a report titled, “A Fed Housing Fix That’s Hiding in Plain Sight,” PIMCO noted that mortgage spreads, or the gap between Treasury yields and mortgage rates, have remained “unusually wide” as the Fed has maintained its mortgage shedding over the past three years. Indeed, PIMCO observed, those spreads stood “near historically wide levels” at roughly 230 basis points as of last week.
The average rate on the 30-year fixed has declined in recent months, but has averaged around 6.35%.
“Reinvesting the proceeds of principal and interest payments by mortgage borrowers behind MBS on its balance sheet could do as much, if not more, than rate cuts to lower mortgage rates, wrote Marc Seidner, chief investment officer of non-traditional strategies, and Pramol Dhawan, portfolio manager at PIMCO,” Reuters stated.
“In a cycle where interest rate policy is politically fraught and inflation remains sticky, the Fed may find that the most effective easing tool is already hiding in plain sight,” the report states.
Option One
According to Reuters, one option suggested by Seidner and Dhawan would be to reinvest the current MBS roll-off, which averages roughly $18 billion each month. The duo estimate that could reduce mortgage rates by 20 to 30 basis points.
“It could deliver as much bang for the buck as a 100-bp cut to the federal funds rate, which is what has historically been needed to achieve a similar drop in mortgage rates,” they said in the report.
Option Two
The report further suggests another option would be to both reinvest the current MBS roll-off and sell between $20 billion to $30 billion in their MBS to reinvest in current securities. This could lead to a 40 to 50 bps reduction in mortgage rates, Seidner and Dhawan wrote.
