Fed Mortgage Bond Program, June 4 to June 10 (week 23)

This week was the 23rd week of a mortgage bond purchase program by the Federal Reserve—here’s week 22. Beginning on June 4 and ending on June 10, the Fed bought $23.02b 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 4.5% and 5.5% coupons this week which represent outstanding loans in the 4.75%-5.125% and 6.0%-6.25% ranges respectively. Rates continued their third week of getting markedly higher since May 21, as a significant mortgage bond selloff continued pushing bond prices down—when bond prices decrease in a selloff bond yields (or rates) rise.

The Fed has been using their mortgage bond buying 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 three weeks: private sellers started in heavy on supply concerns about not only too many Treasury bonds coming into the market as the government sells these to raise money for government stimulus. This is in addition to mortgage bond supply that’s coming in massively as all the low-rate refis of the past two quarters come into the bond market. As we moved through this third week of private selling pressure, the Fed hasn’t adjusted from their average weekly buying to offset this.

The result is rates that are now almost .75% higher than they were three weeks ago.

This significant rate climb 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.

Now we’re beginning to question this. It seems unless the Fed steps in more significantly with buying or the economic recovery is threatened, their current buying isn’t enough to even keep rates low. The irony is that rising rates do in fact threaten the economic recovery.

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 $564.61b net of mortgage bonds, which is 45.17% of their allotted $1.25t target by December.