Mortgage-Backed Securities
Bonds backed by pools of residential or commercial mortgages, held in massive quantities by the Fed as part of QE programs — their runoff is a key component of quantitative tightening.
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What Are Mortgage-Backed Securities?
Mortgage-backed securities (MBS) are bonds created by pooling thousands of individual home mortgages into a single tradeable security. The monthly mortgage payments from homeowners flow through to bondholders as interest and principal payments.
Agency vs Non-Agency MBS
- Agency MBS: Guaranteed by government-sponsored enterprises (Fannie Mae, Freddie Mac) or the government agency Ginnie Mae. These carry an implicit or explicit government guarantee and are considered near-risk-free
- Non-agency MBS: Issued by private institutions without government backing. These were at the centre of the 2008 financial crisis
The Fed and MBS
The Fed holds roughly $2.3 trillion in agency MBS, accumulated during multiple rounds of quantitative easing. As part of QT, the Fed is allowing MBS to roll off its balance sheet at up to $35 billion per month. Because homeowners can prepay mortgages at any time, the actual pace of MBS runoff depends on refinancing activity — which in turn depends on mortgage rates.
Why MBS Matter for Markets
MBS are the backbone of the US housing finance system. Their yields directly influence mortgage rates, which affect housing affordability and construction activity. The Fed's MBS holdings and their runoff pace are closely watched as a gauge of how aggressively policy is tightening.
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