Banks and the Fed’s Duration Trap

This is a syndicated repost courtesy of theinstitutionalriskanalyst. To view original, click here. Reposted with permission.
Atlanta | Is a conundrum worse than a dilemma? One of the more important and least discussed factors affecting the financial markets is how the policies of the Federal Open Market Committee have affected the dynamic between interest rates and asset prices. The Yellen Put, as we discussed in our last post for The Institutional Risk Analyst, has distorted asset prices in many different markets, but it has also changed how markets are behaving even as the FOMC attempts to normalize policy. One of the largest asset classes impacted by ‘quantitative easing’ is the world of housing finance. Both the $10 trillion of residential mortgages and the ‘too be announced’ or TBA market for hedging future interest rate risk rank among the largest asset classes in the world after US Treasury debt. Normally, when interest rates start to rise, investors and lenders hedge their rate exposure to mortgages and mortgage-backed securities (MBS) by selling Treasury paper and fixed rate swaps, thereby pushing bond yields higher.

This post was published at Wall Street Examiner by (Admin) Bill Patalon ‘ November 30, 2017.

 

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