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Fed’s $2.6T MBS dilemma – rising rates could trigger massive portfolio losses

The FED currently hold $2.6T worth of mortgage-backed securities.

James Van Straten
May. 17, 2023 at 12:15 pm UTC
1 min read
Updated: May. 17, 2023 at 12:03 pm UTC

Quick Take

  • “A mortgage-backed security (MBS) is an investment secured by a collection of mortgages bought by the banks that issued them. Mortgage-backed securities are bought and sold on the secondary market. An MBS is a type of asset-backed security”.
  • 2008 during the GFC, the Federal Reserve had to step in and buy MBSs to support the economy, add liquidity to the market, and keep interest rates low.
  • Fast forward 15 years, and FED now holds $2.6 trillion worth of MBS.
  • These MBS will not be worth $2.6 trillion with rising interest and mortgage rates. Selling below par for the FED would see huge losses on their portfolio and “mark to market losses.”
  • What would the new value of these securities be? Substantially less.
  • It would make more sense for the FED to offload these securities before a higher % becomes more underwater.
  • Each time the FED tries to offload these MBS, they have to keep buying them up over the long term.
MBS: (Source: FRED)
MBS: (Source: FRED)
Analyst View profile
James Van Straten
James Van Straten
Former Lead Analyst CryptoSlate

James fervently appreciates data, technology, and trend-spotting. As a tech and liberty maximalist, he hails Bitcoin as the 21st century's paramount invention.

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