The release of the December FOMC minutes hint that some members think that slowing or stopping asset purchases under QE3 before the end of 2013 may be warranted; but it’s likely that MBS purchases will continue at the projected pace.
Analysts at Barclays Capital said in Jan. 4, securitization report that the Dec. FOMC minutes indicate a lack of consensus about when asset purchases under QE3 should end. These doubts over the Feds timeline caused lower coupons weaken significantly, said analysts at Barclays Capital in a securitization report last Friday. FN 3s dropped by 6 ticks, while 3.5s lost 5 ticks after the FOMC minutes were released.
According to the Barclays report, the minutes revealed that those participants who had factored a continuation of asset purchases into their economic projections “were approximately equally divided” between those who expected a completion of purchases near the middle of 2013 and those who judged that purchases would be required to persist for longer.
But the FOMC minutes also show that participants discussed the benefits of MBS purchases relative to Treasuries, and suggest a preference for MBS, because this provides more support to the housing sector. The Fed is expected to buy $500 billion in MBS in 2013.
As a result, Barclays said it expects asset purchases to continue until year-end but anticipates that activity will be tapered in the second half of the year by halting Treasury purchases but continuing MBS purchases.
“We see little that would lead us to change our expectations for Fed support in 2013,” said analysts. “If the Fed chooses to reduce the size of asset purchases before year-end 2013, it would most likely take place by reducing Treasury purchases first. Thus, we do not view the December FOMC minutes as any sort of retrenchment in the Fed’s support for MBS.”