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Fed Inventory Not Budging For Now

While the Fed raises short term rates in a fairly dramatic fashion, it isn't doing much to unload its hoard of Treasuries and Mortgage Backed Securities. There is a slight tip down in Treasury holdings, (red) but Mortgage Backed holdings (blue) remain flat. That works as a doorstop on ten year maturities.

Since mortgages are extinguished whenever a home changes hands, it means the Fed is still buying them to maintain inventory at a static level. That tactic affects pricing.

Since this type of intervention by the deliberate flattening of the long end of the yield curve is a relatively new policy tool, the old saw about an inverted yield curve signaling a recession may not hold true. Especially since the Fed apparently has no intention of letting the long end running away from them.


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