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The U.S. Federal Reserve is set to begin the process of shedding the $4.5 trillion bond portfolio acquired during the financial crisis. Part of the sum is a $1.78 trillion mortgage bond portfolio, which it will also begin selling next month, a move that has some fund managers on edge.
A number of analysts, at firms such as Barclays and Morgan Stanley, have advised investors to underweight their government-backed mortgage bonds prior to the Fed’s announcement as a precautionary measure, Bloomberg reports.
Many real estate investment trusts are taking the opposite approach. According to Bloomberg, REITs have been raising cash at the fastest rate since 2013, and could now buy an estimated $30B of the available securities. Similarly, banks have added almost $100B of mortgage bonds to their books.
The buying shows that, even if the Fed scales back, the activity of other investors is likely to cushion any disruption that may take place, at least in the near term, Bloomberg reports. The Fed is expected to begin shrinking its portfolio by $4B in October, and will gradually increase the sell-off each quarter.
The Fed hopes that a slower sell-off plan will help to avoid a large market disruption, taking largely the same deliberate approach it has when it has come to raising interest rates.
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