U.S. agency mortgage spreads narrow on Fed statement

NEW YORK (Reuters) - Risk premiums on U.S. agency mortgage-backed securities narrowed slightly after the Federal Reserve confirmed its commitment to buying up to $1.25 trillion of the securities by year-end.

Treasuries underperformed after the Fed said it would extend the Treasuries purchase program by one month but keep the amount unchanged at $300 billion. Price declines have been pared after the initial selloff in both MBS and Treasuries.

Fannie Mae 30-year 4.5 percent bonds yielded about 93 basis points more than Treasuries, compared with 95 basis points before the Fed's announcement.

Late Tuesday, the spread was narrower still, at about 86 basis points.

The initial response was muted, but longer-term the Fed's stance raises concerns about what other investors will step up to fill the Fed's giant shoes, said Matthew MacDonald, senior portfolio manager for retail MBS and managing director at Deutsche Bank asset management unit DWS Investments.

With the months dwindling until the GSE debt purchase programs are slated to end, "at a minimum it creates uncertainty about the balance between supply and demand," he said.

The Fed's Treasury purchase program was far more symbolic, most mortgage bond participants agree, with the size a drop in the bucket compared with the enormous debt issuance.

"At a minimum, we're less certain now about how supply will be met" as the Fed uses up its capacity, MacDonald said.

"Did mortgage spreads get to levels that were maybe not supportable by the inherent demand in the market? If they did, then they have to go wider to get back into equilibrium with the inherent demand," he added.

If mortgage rates rise, loan origination could decline, which would contain supply and temper the spread widening.

Yield spreads on U.S. agency notes, meantime, remained narrowly mixed after the Fed statement. The Fed said it was also keeping unchanged the terms of the agency debt purchase program, for up to $200 billion before the end of the year.