Fed may have missed best opportunity for selling off mortgage bonds

Logo of insurer American International Group Inc. on a window at the company's office in lower Manhattan


Stacey Vanek Smith: Back in April, when the Fed spurned AIG's offer, the market for mortgage-backed securities was hot. Prices were rising, hedge funds were snapping them up and the Fed saw dollar signs.

Dan Nigro is principle at Warfield Consultants.

Dan Nigro: The first two or three auctions went along very well, were over-subscribed and dealers were climbing over themselves. Then the U.S. started to trail off a bit in terms of the economic numbers.

And the Fed started having trouble unloading those mortgage bonds, and just announced plans to stop selling them for now. Chris Whalen heads Institutional Risk Analytics. He says back in April, the mortgage bond market was very different. It had a huge boost from the government, which was buying up billions in bonds as part of a plan to help the economy, and the housing market looked poised for a turnaround.

Chris Whalen: The Fed intervention in the market has grown less and also I think the news about the housing market and the actual defaults that investors are seeing on these securities are making them go down in price.

Whalen says the housing market is a long way from recovery, so the Fed may have to hold on to those billions in bonds for the foreseeable future.

I'm Stacey Vanek Smith for Marketplace.

About the author

Stacey Vanek Smith is a senior reporter for Marketplace, where she covers banking, consumer finance, housing and advertising.


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