Fed Mortgage Bond Program, December 31 to January 6 (week 53)

This was week 53 of a mortgage bond purchase program by the Federal Reserve—here’s weeks 51-52. Between December 31 and January 6, the Fed bought $12b net of mortgage bonds. This is just above the weekly low for the entire program set last week with $9.3b in net buys. Below is a breakdown of buying by coupon and agency. The Fed continued focusing on 4.5% and 5% coupons for the fourth straight month, which represent outstanding loans in the 4.75%-5.125% and 5.375%-5.75% ranges respectively. This makes sense since most of the new supply from new loans being made are at those rate ranges. Rates moved up about .2% in the past week as markets feel OK about economic recovery and traders realized that we’re in the final stages of Fed rate support.

How Long Fed Rate Stimulus Will Last?
The purpose of the Fed mortgage bond buying program is to elevate mortgage bond prices which pushes rates down. It’s very likely that the November 25 record rate low that markets hit will remain the record low. The Fed will continue buying through March 31, 2010 until they reach their $1.25t budget (see program-to-date tally below), but as we move into this final three months, we’re likely to see private mortgage bond investors trimming positions which also creates upward rate pressure.

The money manager strategy since the Fed MBS program was announced in November 2008 (and implemented January 1, 2009) has been to buy MBS ahead of Fed buying and sell at a profit before the Fed does. So if the money mangers start selling mortgage bonds as we get closer to March 31, 2010, and also the Fed starts selling when the economy improves, that will create potentially sharp upward rate pressure.

Our 2010 rate outlook is for rates to go about 1% higher as Fed support wanes.

What Mortgage Bond Buying Means for Rates And Consumers
We cover the Fed mortgage bond buying closely to try to help consumers make decisions but the main point is: rates are near all-time record 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, your window is closing. As we move through 1Q2010, we’re likely to see rates rise as private mortgage bond investors sell holdings.

Also see this report and this 2010 rate outlook for easy to understand descriptions of the Fed program and what it means for consumers, keeping in mind the rates referenced in those pieces are dated (and rates change all day everyday as mortgage bonds trade).

Tally Of Mortgage Bonds Bought By Fed
The Fed, according to their own reporting, has bought $1.126t net of mortgage bonds, which is 90.10% of their allotted $1.25t target by March 2010. This isn’t an official number, it is a close tally The Basis Point has kept of weekly net MBS purchases since the Fed began buying in January 2009. Here’s the current and detailed report of the Fed’s MBS holdings.