The announcement that the Fed will start to taper its purchases of MBS this month is not set to widen mortgage spreads. The cut in demand will be gradual and offset by a moderation in the supply of MBS as home sales decline. With the cost of the prepayment option set to remain low, we expect the spread between the 30-year mortgage rate and 10-year Treasury yield to stay close to its current level of 170bps over the next few years.
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