by Calculated Risk on 2/25/2010 07:48:00 PM

Earlier I discussed the possible impact of the end of the Fed's MBS (Mortgage Backed Securities) purchases on mortgage rates: Fed MBS Purchases and the Impact on Mortgage Rates. My estimate is that the spread between the Freddie Mac 30 year fixed mortgage rate and the Ten Year Treasury yield will increase by about 35 to 50 bps after March.

Analysts at Amherst Securities wrote today that they "don’t think there will be much of a widening", perhaps less than 25 bps, because some usual investors are under weighted in MBS. They also noted that "the widening may not happen for a number of months" as under weight investors add to their positions.

I also checked the recent residential MBS issuance and compared it to the same month Fed buying. The GSEs issued about $131 billion in residential MBS in December. And according to the NY Fed, net Fed agency MBS purchases were just over $62 billion in December. So the Fed bought about half of the new issuance; private buyers bought the other half.

Just two points to remember: there are private bidders (it is just a matter of price), and the increase to the normal spread might take a few months.