by Calculated Risk on 1/05/2010 06:49:00 PM

From an interview in Time: Pimco's Bill Gross Sees 2010 as Year of Reckoning. Excerpts on MBS:

Gross: I think the Fed's statements suggest that they really want to exit in some fashion from the buying program. The first step in that direction, logically, would be to stop buying and our sense is that they're at least going to try that. But based on our forecasts for the second half of the year they may have to re-initiate it, and that will be difficult to do once they stop because it then becomes a political hot potato.

All that said, I think they'll stop buying mortgage agency securities, and the trillion-and-a-half dollar check that's been written over the past 9 to 12 months basically disappears. ...

TIME: Because they might have to restart the buying program later?

Yes, I think the Fed wonders about this as well. ... They won't sell — it's a near impossibility to unload what they've purchased over past 12 months. But they'll at least stop buying.

TIME: Won't that put upward pressure on interest rates?

I think it will. I mean the mortgage market would be your first place to look in terms of something that's overvalued that would become normalized. Nobody knows what the Fed's buying is worth — we think about half a percentage point on rates, but we don't know.

But secondly, there's a ripple affect. ... They're buying a trillion dollars of them, or have over the past 9-12 months, and so we sold them a lot of ours. Now, what did we do with the money? We bought Treasuries, we bought corporate bonds, and so the bond markets in general have benefited, as have stocks because this available money effectively flows through the capital markets. ... How that affects the markets, I just don't know. I'm not eagerly anticipating the answer, but I think it holds some surprises in 2010, not just in mortgage securities but stocks as well. We could miss the money, put it that way.
emphasis added

So Bill Gross is thinking we will see about a 50 bps increase in mortgage rates when the Fed stops buying MBS, but admits he really doesn't know. He also thinks the Fed will stop buying - probably on the current schedule - but he thinks they may want to re-initiate the program in the 2nd half of 2010.