Fed Mortgage Bond Program, June 18 to June 24 (week 25)
This week was the 25th week of a mortgage bond purchase program by the Federal Reserve—here’s week 24. Beginning on June 18 and ending on June 24, the Fed bought $22.25b 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 again this week which represent outstanding loans in the 4.25%-4.675% and 4.75%-5.125% ranges respectively. This week built slightly on last week’s recovery following a three-week spike in rates caused by a major bond sell off—when mortgage bond prices drop in a selloff rates rise. Two weeks ago rates were higher by about .75% and now we’ve regained almost .5% of that.
The Fed has been using their mortgage bond buying program all year to elevate mortgage bond prices which pushes rates down. Factors affecting rate levels are which coupons the Fed buys weekly 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 five 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 the last two weeks showed a rather healthy rally in mortgage bonds. All the while, the Fed hasn’t changed it’s average weekly purchase amounts.
In the heat of the rate spike, 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 five weeks.
We’re sticking with our position since March that further significant rate drops as a result of Fed mortgage bond buying don’t seem 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. 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. This newly developing theory that the Fed won’t step in more heavily so as to let markets figure it out for themselves still needs more time to develop and we will continue to track it weekly.
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 $607.15b net of mortgage bonds, which is 48.57% of their allotted $1.25t target by December.
