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krbd's avatar

Good write-up. I think marginal demand for MBS will remain low for the foreseeable future. The Fed is well below it's QT cap on reinvesting monthly cashflows so the largest price-insensitive buyer is sidelined. Also given what their buying did to spike RE prices I'm not sure they'll want to get into the MBS game again.

A lot of banks also got burned by low-coupon 30yrs during COVID and are sitting on unrealized losses on what are now 8-9yr WAL bonds...with the trillionaire banks forced to include AOCI marks in capital and whispers of smaller Cat 3/4 banks potentially needing to phase-in AOCI to capital they won't want to hold massive amounts of negative convexity. Yes, you can pay on swaps vs them but it's more of a pain to ensure hedge accounting on MBS vs bullet securities like USTs or Agency CMBS.

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