Treasury Unwinds $142B in GSE-Guaranteed Bonds

WASHINGTON, DC-The US Treasury Department has announced plans to dismantle its $142-billion portfolio of GSE-guaranteed mortgage bonds. Starting this month and continuing every month, it will begin selling as much as $10 billion “subject to market conditions,” according to the agency’s statement. If all goes according to planned it will sell off its portfolio within 12 months. “We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the repairing of the housing finance market,” Mary Miller, the Treasury’s assistant secretary for financial markets, said in a statement.

The Treasury Department launched the program in September 2008 when the financial markets were in meltdown mode and even fiscal and monetary conservatives were alarmed that the worse case scenario was set to materialize. The program was supplemented by a similar move by the Federal Reserve, a $1.25-trillion buying spree that ended last year. Today, the central banks hold about $945 billion of mortgage-backed securities on its balance sheet.

With the Treasury exiting the market, however, the result may be an even more uncertain housing finance market, Sam Chandan, global chief economist and EVP with Real Capital Analytics, tells GlobeSt.com. Certainly, Fed economists have inferred that its MBS purchase program has had a significantly positive impact in restoring the secondary mortgage market and in narrowing residential mortgage risk premiums, he says.

Still, “while conditions have improved, it remains unclear if the market can absorb the full extent of Treasury’s dispositions absent moderately higher returns,” Chandan notes. One possible end result? Given continued weakness in the housing market, the uncertain medium- and long-term outlook for the agencies and the changing context of monetary policies, an increase in the supply of mortgage-backed securities has the potential to exert upward pressure on residential mortgage rates. “I expect that the Treasury will monitor the impact of its activities closely, slowing the pace of sales if any adverse result is observed,” Chandan says.