Montreal, Canada

On Wednesday, the Federal Reserve will terminate its historical $1.25 trillion dollar mortgage-backed securities purchase (MBS) program. The buying spree, which helped to boost the Fed's balance sheet from around $750 billion dollars in the summer of 2007 to north of $2 trillion dollars now, is likely to result in higher mortgage rates as the Fed begins to sell these securities.

Thus far, mortgage-backed securities remain in demand as institutions, including mutual funds and foreign governments, accumulate the paper. But in the absence of the Fed, a major buyer since 2008, rates are destined to rise because the Fed's inventory of the stuff has to be sold.

Also, this unwinding is occurring at the same time global market jitters are spreading over concerns of soaring government bond supply; this event alone has started to push long-term rates higher in most industrialized and emerging market economies recently, except Germany.

The Fed's aggressive purchases helped to contain the mortgage-backed crisis while placing a hard bid on the securities towards the end of the credit squeeze.

Last week's big spike in interest rates didn't escape the mortgage market, which are influenced by ten-year Treasury rates. Thirty-year mortgages ratcheted higher towards the end of the week, touching 5.17% before declining modestly.

The last thing the United States needs now is higher long-term interest rates. A major spike in rates would throw a severe blow across the mortgage market, where housing remains weak amid an avalanche of supply and rising foreclosures. Also, mortgage-backed securities, mainly issued by government-backed entities that are basically bankrupt – Fannie Mae and Freddie Mac – will struggle if rates rise too swiftly.

The Fed now has to manage a delicate balancing act. Just who will buy all of this paper is difficult to say; the market has already absorbed a truckload of mortgage-backed securities since credit markets bottomed more than 12 months ago. The massive rally in junk bonds and other speculative credits will probably lend some support to the Fed's selling because the market for high-risk debt is strong – at least for now.

The U.S. real estate market is far from a bottom. Prices for homes might hit a trough this year but important peripheral segments of housing, including refinancing, foreclosure rates, tepid new and existing home sales and lackluster wage growth all portend to a sector that will require government life-support for the next several years.

The Fed might be exiting the MBS market too early because housing hasn't bottomed. If the Fed struggles to unwind this mountain of supply it might have to restart the program.

Would you buy 30-year Fannie Mae or Freddie Mac debt when we're at the cusp of an extended and secular sovereign debt crisis this decade? I would not.