Fed Mortgage Bond Program, January 5-7 (week 1)

Last week was the first week of a $500b mortgage bond purchase program by the Federal Reserve. When the Fed announced the program on November 24, the Fannie Mae 30yr fixed 4.5% bond was trading at $95.44. On January 2, the price was $101.15. By comparison, 30yr fixed mortgages up to $417k were 6.375% on November 24, and they were 5.125% on January 2. A rate drop of 1.25% on the Fed news alone, before they spend one dollar buying bonds.

Beginning on January 5 and ending on January 7, the Fed bought $10.2b of mortgage bonds—below is a table breaking down the durations and amounts. This caused the same FNMA 4.5% 30yr fixed mortgage bonds to go from $101.03 to $102.67, and rates went from 5.125% to 4.875% (note these are all zero points rates).

As we move into the coming weeks and months, it seems the Fed would have to get more aggressive to stay on their (supposedly) six month buying schedule, and rates would drop more. But consider the 1.25% drop was caused by non-government investment. So these investors are likely to exit and take profits when the Fed is reasonably into their buying schedule. So rates should drop more as the Fed buys, but there will come a point when Fed purchases and private selling even each other out.

The question we don’t know at this point is approximately how much volume when into key coupons (4%, 4.5%, 5% on FNMA and FHLMC 30fix) from November 24 to now. That might help to pinpoint what kind of rate benefit we can expect from here. We’ll continue to monitor this topic week to week.