The $1.2 trillion of mortgage-backed securities the Federal Reserve has amassed to stoke economic growth is creating a potential firewall that dealers say is shielding the bond market from a rapid decline as policy makers debate scaling back debt purchases.
The stockpile, which has made the Fed the biggest holder of government-backed mortgage bonds, is cutting the risk that a sudden jump in Treasury yields will lead to an even bigger surge as investors place bearish bets to protect against housing-debt losses triggered by rising rates, a practice known as convexity hedging, according to dealers from Deutsche Bank AG to Barclays Plc. The Fed, which doesn't hedge, owns about 21 percent of agency mortgage bonds, up from zero a decade ago. The share owned by investors that typically hedge has dropped.
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