The U.S. Treasury Department will begin selling about $10 billion a month of mortgage-backed securities as the government winds down emergency programs set up during the financial crisis.
The announcement of a fresh supply of high-quality debt coming to market surprised traders, but they said later it should be manageable. The Treasury has a $142-billion portfolio of MBS, acquired in 2008 and 2009, and estimates it will take about a year to dispose if it.
Its holdings are primarily 30-year fixed-rate mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac, the housing finance giants placed under government control in the fall of 2008 as the financial crisis was raging.
“We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort,” said Assistant Treasury Secretary for Financial Markets Mary Miller.
U.S debt prices posted losses after the report as traders bet the fresh supply of top-quality debt would compete with Treasuries in fixed-income portfolios, while agency MBS spreads versus Treasuries widened.
The Treasury news “was a bit of a surprise,” though at around $10 billion a month the supply will likely be easy to digest, said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.
A Treasury official estimated that it would make a profit of $15 billion to $20 billion on the sales, depending upon market conditions. The Treasury said there will be pre-scheduled times and sizes for the sales, which could occur daily.
State Street Global Advisors is the manager for the Treasury’s portfolio and will handle settlement of the sales.
Fannie and Freddie were placed under government control in September 2008, which effectively made the U.S. taxpayer the backer of about $5 trillion in debt the government-sponsored enterprises had.
At the time, markets were unwilling to buy securities that the two housing finance companies had backed, so the government stepped in to keep mortgage finance flowing.
The Obama administration is working on an overhaul of the housing finance system and there was a fresh reminder Monday that housing markets remain in turmoil. The National Association of Realtors said sales of previously owned homes plunged in February and prices slumped to a nine-year low.
The Treasury has not bought mortgage-backed securities since 2009, and a Treasury official said the judgment was made that market conditions have improved enough and the economy has sufficiently recovered to make it worthwhile to wind down the portfolio.
The Treasury denied the timing of the sales was a tactic to delay hitting the federal debt limit. “The projected pace of sales, $10 billion per month, will not meaningfully extend the expected time until Treasury will reach the debt limit,” it said.
The Treasury said on March 1 that it expected to hit the debt ceiling between April 15 and May 31.
