February 14, 2017 / 8:42 PM / 6 months ago

U.S. mortgage bonds pare losses after Yellen

NEW YORK, Feb 14 (Reuters) - U.S. mortgage-backed securities pared losses on Tuesday in step with the broader bond market following comments from Federal Reserve Chair Janet Yellen, who said she wants the central bank's balance sheet to be primarily made up of U.S. Treasuries.

Yellen was replying to questions about the Fed's $4.5 trillion balance sheet during economic testimony before the Senate Banking Committee.

The Fed's bond holdings had quadrupled from three rounds of bond purchases with the goal to help the U.S. economy in the last recession.

"They want to reduce the balance sheet at some point in time," said Walt Schmidt, head of mortgage strategy at FTN Financial in Chicago.

Several Fed officials in recent weeks have raised concerns that it may be time for the central bank to consider ending its reinvestments in Treasuries and MBS as part of its policy normalization.

As of Feb. 8, the Fed held $2.46 trillion in Treasuries and $1.74 trillion in MBS.

The Fed will be discussing its investment strategy on its balance sheet in the coming months, Yellen said on Tuesday.

In late Tuesday trading, the price on 30-year, 3.5-percent coupon MBS backed by Fannie Mae was down 5/32 at 102-1/32, after hitting a session low of 101-22/32. The yield was 2.195 percent, up 2 basis points on the day.

U.S. five-year Treasuries were down 8/32 in price for a yield of 1.965 percent, up over 5 basis points from late on Monday. (Reporting by Richard Leong; Editing by Leslie Adler)

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