Published Tue, 15 May 2018 08:00:00 -0400 on Seeking Alpha
There has been a lot of speculation about what will happen when the Fed begins to unwind its balance sheet. One of the logical conclusions is that it will boost Treasury bond yields. Deutsche Bank (NYSE: DB) claims it could boost yields anywhere from 0.4 to 0.56%. This makes sense because as the central bank withdraws its demand for treasuries it will drive down the price increasing yields. But what about mortgage-backed securities (MBS)? Couldn't the same thing occur with MBS? The following article will discuss this and if it is likely to happen. If it does this could present additional yield for mREIT ETFs: REM, MORL, MORT, REML, MRRL. This could also mean a decline in the value of MBS ETFs: MBB, VMBS, LMBS, CMBS, MBG, GNMA, MBSD, HQBD.
The Fed's Balance Sheet Starting in 2008 the Fed purchased lots of agency MBS in order to prop up the economy. Since September 2017, the Fed has begun to unwind its balance sheet. The Fed has a balance sheet comprised of the assets below:
Source: The Fed's Quarterly Report for March 2018The Fed is currently holding around 1.7 trillion in agency Mortgage Backed Securities! This is around 29% of all outstanding MBS as of September 2017 according to a study by the Urban Institute.
The Fed is unwinding its balance sheet by letting its assets mature. In other words, the Fed is choosing not to replace its assets. This has already begun to take effect if we look at the more recent change in the total assets by the Fed.
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|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|ISHARES FTSE NAREIT MORTG PLUS CAPPED INDEX FUND||42.48||0.0||0.00||0.00||0.00|
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