Fed in trillion dollar bond bind as it ends QE

More than a decade after it all began, the Federal Reserve is finally nearing the end of its grand experiment in monetary policy.

While Fed officials have made it clear they want to go back to owning mostly Treasurys, as they did before the financial crisis, it’s unclear how the central bank will get there or what it will buy.

Two waysThe Fed reinvests money from its maturing debt holdings in two ways.

Citigroup also predicts two-to-five-year note auctions will shrink later this year as a consequence of increased Fed demand.

Because the Fed currently doesn’t own any bills, the weighted average maturity of its Treasury investments is about eight years.

Regardless, the Fed’s shift away from mortgage bonds could present a risk for the MBS market if 10-year Treasurys — the benchmark for 30-year mortgages in the U.S. — fall below 2.25 percent, according to Walt Schmidt, head of MBS research at FTN Financial.

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