The Federal Reserve reducing its Balance Sheet is big news.

by | Jun 5, 2022 | Saul's Insights | 0 comments

Lesson Plan For The Future

The Economy

The Federal Reserve reducing its Balance Sheet is big news.

Purchasing Mortgage Backed Securities and obligations of the US Government is one way the Federal Reserve controls money flow and credit, pushing money into, and pulling it out of the economy in a few different ways.

“Keeping your powder dry.”

As the Federal Reserve dumps mortgage backed securities from its portfolio to assist in its battle with a huge inflation problem (which is part of the job of the Federal Reserve, to control money flow and credit, as an independent body), investors and investment firms will find value in those assets and buy them in a market with outsized supply, seizing the opportunity.

In an interview with National Mortgage News, Byron Boston, chief executive officer and co-chief investment officer of Dynex Capital Inc talks about the fact that his company has been preparing for this opportunity by building capital over the last few year, and not deploying it:

“As the mortgage assets cheapen and provide better returns, then we’ve got solid capital to deploy,” he said stated.

“The mortgage market literally almost always functions for the most part with a large government entity operating within it. So this is a big moment as the Fed attempts to step away.”

Entire Interview:

This is an important point, perhaps pointing to weakness in some of the paper owned by the GSEs (or sold to entities such as retirement plans, such as Calpers), a point made by Mark Calabria, a former head of FHFA, and mentioned in a previous post.


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