The Fed's intervention in funding markets, while not officially labeled Quantitative Easing, directly helps the Treasury finance its debt, effectively monetizing it and providing critical liquidity to markets.

A $200B government purchase program, which caused a 15-basis-point rally in mortgage spreads, will have a negligible impact on the actual housing market. Forecasts for existing home sales see only a fractional increase, while the home price forecast remains unchanged as any new demand is expected to be met with new listings.

The tightening of agency mortgage spreads from the government's $200B purchase program is expected to have a positive "portfolio channel effect" on other risk assets. Securitized credit, particularly the non-qualified mortgage (non-QM) market, is positioned as a key beneficiary of this ripple effect as investors reallocate capital.

The plan to buy mortgage bonds is not a direct solution for homeowners but a form of money printing (QE). This move likely props up banks holding increasingly unattractive mortgages as housing prices are pushed down, effectively bailing out financial institutions rather than individuals.

A U.S. administration decision for mortgage agencies to buy $200 billion in mortgages had an instant market impact, causing spreads to tighten quickly. In response, Morgan Stanley's mortgage strategy team moved from a positive to a neutral stance, demonstrating how fast regulatory news is absorbed by financial markets.

The Fed's plan to reinvest maturing mortgage-backed securities (MBS) into Treasury bills is a stealth liquidity injection. The US Treasury can amplify this effect by shifting issuance from long-term bonds to short-term bills, which the Fed then absorbs. This is a backdoor way to manage rates without formal QE.

If the GSEs hedge the volatility (convexity) exposure of their new mortgage portfolio, as they have historically, it would increase demand for options in the swaption market. This would pressure implied volatility higher, raising the option cost embedded in mortgages and potentially pushing primary mortgage rates up.

Unlike the Federal Reserve which can create reserves, Fannie Mae and Freddie Mac (GSEs) must fund their mortgage purchases. While they have significant retained earnings, they will likely need to issue short-term debt, creating a funding challenge as they buy long-duration assets with spreads that are negative to their funding costs.

Over the past few years, the Treasury Department and the Federal Reserve have been working at cross-purposes. While the Fed attempted to remove liquidity from the system via quantitative tightening, the Treasury effectively reinjected it by drawing down its reverse repo facility and focusing issuance on T-bills.