Fed Mortgage Bond Program, January 15-21 (week 3)

This week was the third week of a $500b mortgage bond purchase program by the Federal Reserve—here’s week 2. Beginning on January 15 and ending on January 21, the Fed bought $19b 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—$5.8b into FNMA 5.5% 30yr fixed bonds. Below is a table breaking down all purchases for the week.

During this period, rates on 30yr fixed mortgages up to $417,000 to rose from about 5.125% to 5.375% (zero-points rates). There are two possible reasons for this: (1) the Fed’s buying was not enough to offset private selling, and (2) the biggest investment went into the 5.5% coupons and most lenders are pegging rate sheets off of 4%, 4.5%, and 5% coupons right now. Those bond issues, with lighter Fed influence and private selling pressure, dropped in price which caused rates to rise. In the two trading days following this report, the 4%, 4.5% and 5% coupons rebounded in trading, bringing rates to about 5.25% zero points. Remember: these are average rates on loans up to $417k. Better and worse rates are present in the marketplace.

Tally Of Mortgage Bonds Bought By Fed
The Fed, according to their own reporting, has bought $52.6b of mortgage bonds, which is 10.5% of their allotted $500b target by June.

Rates dropped by 1.25% (from 6.375% to 5.125%) between the Fed’s November 24 announcement of the program and the January 5 first-Fed-purchase date. This was private investors getting in before the Fed, just like all the big money managers recommend. It shouldn’t create panic about the viability of the program. The program is working even with private investors looking to exit in the coming months.

Rate lock strategy, especially for refi candidates who have time, are likely to see more benefit on specific trading days when the Fed buys heavily across the 4%, 4.5% and 5% coupons (home buyers are always on the purchase-contract-designated clock with their mortgage rate locks, so they just need to lock when they can).

The trick is that mortgage bond flow data is not as transparent as it is for other markets. So how do you know when Fed buying is benefiting your lock strategy on a given day? You just need to have a lender who watches this data. Because these bonds trade all day every day, a rate can come at a specific time in the day then be gone.