Bloomberg — Matt Scully — The U.S. Federal Reserve is squeezing a good deal of the profit out of mortgage bond trading, and Wall Street banks are increasingly heading for the exits.
Barclays Plc cut 20 jobs in its U.S. government-backed mortgage bond business in January as part of a broader bank reorganization that is cutting 1,200 jobs, according to a person with knowledge of the matter. Deutsche Bank AG and Societe Generale SA have also scaled back in the market in recent weeks, people with knowledge of those moves said.
As the Federal Reserve has vacuumed up nearly a third of the government mortgage bonds in the market as part of its quantitative easing program since early 2009, average daily trading volume has plunged by more than 40 percent. Unlike other investors, the central bank rarely trades its mortgage bonds.
“What incentive do banks have to stay in the business in a largely price-controlled market?” said Danielle DiMartino Booth, a former policy adviser at the Dallas Fed. Eric Kollig, a Federal Reserve spokesman, declined to comment.
True, The Fed’s repression of the short-rates on the yield curve and attempts to manipulate the longer-term rates has made the world of agency mortgage-backed securities … boring.
But the same can be said as to why big banks remain in the mortgage market at all. Heavy regulation from the Consumer Financial Protection Bureau (CFPB) and rate repression/manipulation from The Federal Reserve makes mortgage lending problematic.
Indeed, large banks are shedding their residential lending.
But seeing investment banking firms shedding agency MBS is just the other shoes falling.
Take a Fannie Mae 3.5% coupon RMBS. Its yield is highly correlated by the US Treasury 10 year yield. And yields are plunging.
As is the duration (weighted-average life) of the Fannie Mae RMBS.
As we approach (perhaps) the lower-bound on longer-term interest and mortgage rates, this could cause a lack of appetite for lenders and investors.
If the 30 year mortgage rate and the 10 year Treasury yield have bottomed out, there is no where to go but up.
We now live in a plain vanilla mortgage and mortgage-backed securities world. Boring!!!