Though banks shed their MBS holdings by a considerable $41 billion in the third quarter (after adding $132 billion in Q203), researchers expect a strong rebound in bank mortgage purchases for the fourth quarter.

Credit Suisse First Boston stated in a report that the previous rise in MBS purchases by banks has been hand-in-hand with declines in corporate and investment (C&I) loan holdings. CSFB predicts that banks will remain involved in the MBS sector even with economic recovery and C&I loan demand picking up. C&I net debt growth rate is estimated to be negative $200 billion by CSFB. For an en masse movement away from MBS, C&I loan demand will need to increase at a rapid pace, wrote analysts.

The $41 billion third quarter drop in bank holdings of mortgages was comprised by a dip of $73 billion in securities and a rise of $32 billion in loan purchases — a sharp contrast to the second quarter of this year. In 2Q03, the overall growth in mortgage holdings was driven by $61 billion in securities purchases as well as $70 billion in loan purchases.

The majority of the decline in holdings on the securities front is caused by a $77 billion dip in Agency securities holdings. This was made up mainly of a decline in pass-through holdings totaling $52 billion along with a significant drop in Agency CMO holdings of $25 billion.

A significant factor contributing to the drop in bank holdings of Agency securities in the third quarter was the overall drop in the weighted average price of collateral by roughly 1%, attributed to the 51 basis points sell-off in 10-year swap rates over this period. Within the context of an aggregate $800 billion of Agency securities held by banks, this 1% dip in collateral prices would be worth about 10% of the over $70 billion drop in Agency holdings from quarter to quarter.

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