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Annaly exec: Fed's balance sheet plans could create trading opportunities

The U.S. Federal Reserve should encounter a fairly smooth transition process as the central bank embarks on plans to normalize its balance sheet, Annaly Capital Management Inc. Chief Investment Officer David Finkelstein said.

While discussing the Fed's timetable for unwinding its $4.5 trillion balance sheet, Finkelstein said he expects the central bank to reduce purchases of agency-backed mortgage-backed securities by $4 billion a month, beginning in September. Subsequently, Finkelstein anticipates that the Fed will increase the caps throughout 2018, leaving the central bank in the market for reinvesting a portion of their run-offs in agency-backed mortgage-backed securities for quite "some time."

In addition, Annaly's models show that the Fed will purchase as much as $10 billion a month in mortgage-backed securities through the middle of 2018, Finkelstein said during the company's second-quarter earnings conference call. Within the next 15 months to 18 months, the Fed could be out of the market altogether, he predicted.

Drawing comparisons with the Fed's decision to scale back a comprehensive asset purchasing program in the wake of the financial crisis, Finkelstein said the central bank is being even more transparent in outlining a game plan for shrinking its balance sheet. Although Finkelstein is hopeful that the Fed will maintain a presence in the mortgage market, he said the normalization process could lead to additional trading opportunities for Annaly.

Finkelstein's comments came less than a day after San Francisco Federal Reserve President John Williams said the Fed should take about four years to complete the unwinding process. In June, the Federal Open Market Committee unveiled a proposal to reduce the Fed's securities holdings gradually, providing indications that it could announce plans to normalize the balance sheet as early as September.