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.
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.
Low demand is the base case absent QE or and influx of liquidity into the banking system. Some SLR reform while not direct would also benefit.