Fed Mortgage Bond Program, January 22-28 (week 4)
This week was the fourth week of a mortgage bond purchase program by the Federal Reserve—here’s week 3. Beginning on January 22 and ending on January 28, the Fed bought $17b 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 was $4.7b into FNMA 5.5% 30yr fixed bonds, and this is the second week in a row the Fed has focused on 5.5% coupons, ostensibly because these coupons represent existing mortgages in the 6% to 6.5% range. So if all of these mortgages are in the process of being refinanced right now, the Fed gets paid right back when the loans and bonds are paid off (more below on why they’re doing this).
If the Fed isn’t buying lower coupons like 4% and 4.5%, it doesn’t help drive rates down, and in fact private selling pressure on those lower coupons (and very minimal Fed support) has driven rates up this week—30yr fixed mortgages up to $417k with zero points are approaching 5.5% versus 5.25% last week. 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 $69.6b of mortgage bonds, which is 13.9% of their allotted $500b target by June. Although after this Wednesday’s FOMC meeting, the Fed said they’ll go beyond that initial budget and date target as necessary. The buying of higher coupons as discussed above enables them to do this—so even if rates don’t drop significantly from here, they’re unlikely to spike near term.
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. We’re only .375% above that target, so there’s most likely going to be a +/- 0.5% trading range in the coming months.
Rate lock strategy, especially for refi candidates who have time, is to pick a price target within this current range of the past 4 weeks and lock as the market trades into this range (home buyers are always on the purchase-contract-designated clock with their mortgage rate locks, so they just need to lock as appropriate for their timing).
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.
