Agency mortgage-backed securities have become much more expensive over the past 16 months, following the onset of the COVID-19 pandemic. Market participants are aware that the option-adjusted spread (“OAS”) on these securities has tightened, and most would attribute this to the buying of mortgage-backed securities (“MBS”) by the Federal Reserve. After dramatic intervention in March and April of 2020, the Federal Reserve has been replacing runoff and adding $40 billion a month in new holdings.Thus, some tightening would be expected due to the re-introduction of Federal Reserve demand. Remember, from 2014 to March of 2020 when the pandemic started, the Fed was letting its MBS holdings run off.

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