The Fed & Treasury worked over the weekend on the government’s “bailout” plan for the financial industry. The bill is waiting congressional approval and is likely to allow the government to buy up to $700 billion in mortgage-backed securities from financial institutions.
Mortgage-backed bonds are suffering on the news because of inflationary concerns. In order for the government to pay for this plan they will have to print more money and that does not bode well for inflation.
There still exists a spread between 30-year treasury bonds and 30-year mortgage backed bonds which we continue to believe will converge (meaning mortgage rates will have to go down and/ or treasury bond yields will have to rise).