Fed Mortgage Bond Program, January 21-27 (week 56). Fed At 93% Of $1.25t Budget.

This was week 56 of a mortgage bond purchase program by the Federal Reserve—here’s week 55. From January 21 to January 27, the Fed bought $12b net of mortgage bonds. This is just above the weekly low for the entire program set four weeks ago with $9.3b in net buys, and clarifies a trend of less buying as the Fed’s budget runs low. For the past 4.5 months, the Fed has focused weekly buying on 4.5% and 5% coupons (table below), 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. Long-term mortgage rates were steady this week as Congress reconfirmed Fed chairman Ben Bernanke and the FOMC acknowledged ‘subdued’ inflation.

How Long Will Current Rates 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 record rate low markets hit on November 25 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 two 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 the Fed also starts selling (as a rate hike measure) once the economy shows sustained improvement, that could create potentially sharp upward rate pressure.

But if rates did rise, there would be less MBS supply to absorb. Also very strict loan approval standards mean that high quality loans underpin new MBS issues—so over time, private MBS markets should re-emerge as the Fed eases off.

The end result of these battling MBS market forces (plus the rest of the economic picture) is lots of rate volatility during 2010, and our 2010 rate outlook is for rates to rise about 1%.

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.

Also see this report and the 2010 rate outlook linked above 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 $1.164t net of mortgage bonds, which is 93.10% of their allotted $1.25t target by March 31, 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.