Fed Mortgage Bond Program, June 11 to June 17 (week 24)
This week was the 24th week of a mortgage bond purchase program by the Federal Reserve—here’s week 23. Beginning on June 11 and ending on June 17, the Fed bought $20.29b 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 focused on 4.0% and 4.5% coupons this week which represent outstanding loans in the 4.25%-4.675% and 4.75%-5.125% ranges respectively. After three weeks of rates rising by about .75% on continued mortgage bond selloffs, this week we saw rates recover by about .30%.
The Fed has been using their mortgage bond buying program all year to elevate mortgage bond prices which pushes rates down. It depends on factors like which coupons they buy week to week and how much, amount of private selling pressure their is working against Fed buying, and how much supply is coming onto the market. Looking at these factors in the context of the last four weeks: we had three weeks where private sellers sold massively on concerns of too much Treasury bond issuance to raise money for stimulus and too much mortgage bond supply from all the low-rate refis of the past two quarters coming into the bond market. Then we had this last week of a rather significant rally in mortgage bonds. All the while, the Fed hasn’t changed it’s average weekly purchase amounts.
Last week, we expressed concern that rising rates threaten economic recovery and that the Fed might have to step in to help prop up rates. You could now argue that the Fed believes in market forces enough not overcompensate with their support, hoping markets would figure out the rate-up-economic-recovery-down relationship themselves. If that is in fact the Fed’s approach, it seems to have worked over the past month—if this past week’s rate stabilization doesn’t deteriorate.
The rate spike of the past month still confirms our position for months that further significant rate drops as a result of Fed mortgage bond buying don’t seem likely because rates have (or perhaps had) 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. We’ve also been saying the Fed’s mortgage bond budget 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, keeping in mind the rates referenced in that piece are dated. We will continue to monitor this weekly like we have been—to try to help consumers make decisions but the gist 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, this year is your time, with the safe bet being before the Fall.
Tally Of Mortgage Bonds Bought By Fed
The Fed, according to their own reporting, has bought $584.90b net of mortgage bonds, which is 46.79% of their allotted $1.25t target by December.
