Market Analysis

From a technical perspective (statistical charting) the market for Fannie Mae and Freddie Mac mortgage-backed securities (MBS) appears ready for a correction to higher rates.  However, this may or may not happen due to the presence of the Federal Reserve in the market purchasing much of the MBS on the market at prices that are higher than the private market could pay due to higher cost of funds for the private sector.  If the US Treasury can borrower at 2.3% on a 10 year Treasury as long as they earn above that buying Fannie and Freddie MBS, they can come out ahead.  The "risk premium" that the private market places on Fannie and Freddie MBS is not as much of a consideration to the Federal Reserve because they probably believe the Treasury would be on the hook anyway for Fannie/Freddie obligations, particularly when those entities are operating under government conservatorship.  As the Federal Reserve pays higher prices for MBS the spread between the 10 year treasury and the Fannie and Freddie MBS has narrowed.   The risk then is that there is such a large correction to the 10 year Treasury - for instance with yields rising from 2.3% to the high 3's that it will cause a correction in the Fannie/Freddie MBS even with the Federal Reserve in the market as the largest buyer.