Fed's QT end could impact mortgage rates

"Our house forecast is that they take the MBS paydowns, which are roughly about $16 billion a month, and reinvest those into Treasury bills, said Jeana Curro, managing director and head of agency MBS research at Bank of America. That aligns with a lot of the rhetoric from this Fed. They've said they ideally want to hold a Treasury-only portfolio."

"In the mortgage sector, secondary market executives expect a positive impact, largely due a decline in 10-year Treasury yields. These tend to move in tandem with 30-year mortgage rates due to their similar long-term nature. I do believe this will be a rising tide that lifts all boats, said Scott Ferrell, executive vice president and director of capital markets at AnnieMac Home Mortgage. Mortgages should follow along nicely."

The Federal Reserve's balance sheet expanded from about $2.2 trillion in 2008 to $4.2 trillion in 2020, peaking near $9 trillion in 2022 and declining to $6.5 trillion composed of about $4.2 trillion in Treasuries and $2.1 trillion in MBS. Market consensus anticipates the end of quantitative tightening with the Fed reinvesting roughly $16 billion a month of MBS principal repayments into Treasury bills, moving toward a Treasury-only portfolio. Analysts forecast the shift from MBS to Treasurys at $10–20 billion per month. Mortgage-market participants expect lower 10-year yields to reduce 30-year mortgage rates, supporting refinance demand.

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