Rate Relationship

As the Fed reduces its huge balance sheet over the next several years, what will its eventual holdings consist of? Traditionally, it’s only been Treasuries. Now, holdings include $1.8 trillion in mortgage-backed securities, bought to support housing, and $2.5 trillion in Treasuries. As the Fed sells both, rates will rise, but importantly the spread between 30-year mortgages and 10-year Treasuries will widen, pushing mortgage rates up by an extra eighth-of-a-point.