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Big Runoff for Fed MBS Portfolio?

The Federal Reserve could see 20% of its $1.11 trillion portfolio of agency MBS run off due to refinancings and other prepayments by July 2011, according to mortgage strategists at Credit Suisse.

"The paydowns should be around $233 billion over the next 12 months (August 2010-July 2011), if the 4.5% mortgage rate is sustained," a Credit Suisse mortgage securities Market Watch report said.

The central bank recently said it would begin investing the MBS prepayment proceeds in long-term U.S. Treasury securities. Minneapolis Federal Reserve bank president Narayana Kockerlakota said the Fed made this decision to prevent rates on long-term bonds from rising, "which would be a drag on the real economy."

The Credit Suisse strategists note in their weekly report that the Fed purchased newly issued Fannie Mae, Freddie Mac and Ginnie Mae MBS from January 2009 through the first quarter of 2010. The agency MBS are "mostly new vintage low coupons, which are "most sensitive to changes in mortgage rates."

They estimate paydowns could range from $281 billion if mortgage rates fall to 4.25% or $160 billion if rates go up to 4.75%.

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