US Treasury Unwinds MBS Securities, Lifts Dollar

By Marc Chandler

News that the US Treasury will begin selling off its portfolio of mortgage-backed securities was greeted with dollar buying. The Treasury’s portfolio of $142 bln of agency guaranteed MBS will be sold at a pace of $10 bln a month. The sales will start this month, according to reports and that Treasury Department expects to make a $15-$20 bln profit.

This is of course different than the Federal Reserve sales, but the fact that the Treasury is citing improved market conditions is notable. The consensus is for the Federal Reserve to complete its $600 bln Treasury purchases under QEII. The question is the Fed’s exit strategy. In particular, what happens to the maturing issues and will it continue to recycle those proceeds back into the Treasury market or will it accept a passive shrinkage of its balance sheet.

In the mean time, the euro pullback from the $1.4200 area to about $1.4140 appears to have exhausted the move. The move also coincided with a news wire report indicating that a majority of euro zone members believe that Portugal will need assistance by the end of June. We had thought earlier and as early as the March 24-25 summit.

Global bonds, already under pressure from the relaxation of anxiety and the rally in equity markets, are falling further. Short-term interest rate differential are, however, continuing to move in Germany’s favor, under scoring one of the key drivers