Treasury yields could rise when Fed stops MBS buying, experts say

01/22/2010 | International Business Times

Increased volatility and higher yields are likely to sweep through the market for U.S. government bonds when the Federal Reserve stops buying mortgage-backed securities, analysts said. The higher MBS yields demanded by private investors are likely to drive up home mortgage rates, triggering a strategy known as "convexity hedging" that stands a good chance of depressing Treasuries and forcing up their yields, they said. There are some indications the markets are already anticipating this. "Some feel that the recent market moves reflect investor positioning for the end of several unconventional Fed facilities," said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management.

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