Fed’s MBS exit surprises some with muted rates vol

Shrinking of huge portfolio led to predictions of vol jump that – so far – has not appeared

For years, mortgage-backed securities (MBSs) were the tail that wagged the US rates dog. When rates moved up or down, hedging activity from investors noticeably moved the market and raised volatility.

Their impact lessened when the Federal Reserve built up a $1.8 trillion portfolio of agency MBSs after 2008. With that programme winding down and the bonds increasingly returning to the hands of private investors, some market participants believed MBS hedging was set to become a big rates vol