Fed Mortgage Bond Program, December 17-30 (weeks 51-52)

This report covers weeks 51 and 52 of a mortgage bond purchase program by the Federal Reserve—here’s week 50. Between December 17 and 30, the Fed bought $24.3b net of mortgage bonds, with $15b bought from Dec. 17-23 and $9.3b bought from Dec. 24-30—this was a weekly low for the program, with the last low being $13.5b set Nov. 5-11. 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. Rates moved up rather significantly during this period due to more positive economic data releases and the trader realization 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.

These past two weeks we saw lower than average Fed buying numbers, which had held around $16b per week for more than two months. This is ostensibly the Fed experimenting with weaning markets off of their support, and rates rose almost 0.5%. This speaks for the effect the Fed can have.

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 at 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, 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 for an easy to understand description of the Fed program and what it means for consumers, keeping in mind the rates referenced in that piece 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 $1.11t net of mortgage bonds, which is 89.14% 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.