Fed Mortgage Bond Program, January 8-14 (week 2)
This week was the second week of a $500b mortgage bond purchase program by the Federal Reserve—here’s week 1. Beginning on January 8 and ending on January 14, the Fed bought $23.4b of mortgage bonds—below is a table breaking down the amounts for each coupon and maturity across the three agencies that issue mortgages: Fannie Mae, Freddie Mac, and Ginnie Mae. The largest investment—$7.8b into FNMA 4.5% 30yr fixed bonds—caused this pricing to go from $102.41 to $102.47 from January 8-14, and prices actually dropped to $101.56 by the end of trading on Friday, January 16.
This caused rates on 30yr fixed mortgages up to $417,000 to rise from about 4.875 to 5.125% (zero-points rates). This mortgage bond sell off and resulting rise in rates happened in trading the two days after the Fed’s reported purchases. Private selling versus Fed buying will be a theme going forward. More on this below.
Tally Of Mortgage Bonds Bought By Fed
The Fed, according to their own reporting, has bought $33.6b of mortgage bonds, which is 6.7% of their allotted $500b by June.
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.
The 1.25% drop was caused by non-government investment. So these private investors are likely to exit and take profits when the Fed is reasonably into their buying schedule. We saw this during the past week, when the Fed eased off, private investors exited and took profits. This is common ahead of holiday weekends, and shouldn’t cause panic about the viability of this program.
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 that’s harder to answer is when is the sweet spot between the Fed getting in and driving rates down, and private investors getting out and driving rates back up. Mortgage bond flow data is not as transparent as it is for other markets.
The safest bet for consumers is to lock rates between February and March, when the Fed buying has the most impact and before private investors start exiting in larger volume. This is a week-to-week issue that we’ll monitor.
