Fed Mortgage Bond Program, April 23-29 (week 17)

This week was the seventeenth week of a mortgage bond purchase program by the Federal Reserve—here’s week 16. Beginning on April 23 and ending on April 29, the Fed bought $23.14b net 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. They continued focus on 4.0% and 4.5% coupons which represent outstanding loans in the 4.5%-5.125% ranges which important to hold rates down. But they also made a giant investment in 5.5% coupons which represent outstanding loans in the 6%-6.25% range. This is also important because when consumers refi their 6%-range loans, the Fed gets reimbursed on those bond buys when the refis close—it helps stretch out the Fed’s mortgage bond buying budget.

Also noteworthy: this week was the first time the Fed bought 3.5% coupons, and while the percentage investment was low, it signals they might buy more. When they buy lower coupons, it drives bond yields lower, which translates into lower rates. Rate markets dropped to some of their lowest levels this year Monday and Tuesday, but right after Wednesday’s FOMC announcement saying the worst economic trouble might be over, stocks rallied and bonds sold off, driving rates back up just as significantly as they had dropped coming into Wednesday.

As we discuss in our weekly reports, the Fed has been using their mortgage bond buying to elevate mortgage bond prices which pushes rates down. But it depends on which coupons they buy week to week, and it depends on how much private selling pressure their is working against Fed buying. This week’s rate volatility proves how even the Fed can’t control markets with a program like this.

Going forward into the coming months, further significant rate drops as a result of Fed mortgage bond buying isn’t as likely because rates have already dropped to historical lows and the Fed will continue to face more private selling pressure as they move deeper into their $1.25t budget (more on this below). The longstanding money manager strategy is to buy agency MBS ahead of Fed buying and sell at a profit before the Fed does. So as we move through the year, the Fed’s mortgage bond budget is might be enough to offset private selling but probably not enough to bring rates down drastically from current levels.

What Mortgage Bond Buying Means for Rates And Consumers
See this report for a detailed description of the Fed program and what it means for consumers. We will continue to monitor this weekly like we have been—to try to help consumers make decisions but the gist is: rates are all-time lows, so if you can get the right price on a property purchase you’ll get a record low rate to go with it. And if you’re looking to refi, this year is your time.

Tally Of Mortgage Bonds Bought By Fed
The Fed, according to their own reporting, has bought $413.02b of mortgage bonds, which is 33% of their allotted $1.25t target by December.