On many occasions, and in many different forums, the Federal Reserve has expressed every intention of winding up its $1.25 trillion program for buying agency MBS by March 31.
The FMOC explained in its January 27th statement:
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets. The Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities…. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter.
By now, everyone is taking the Fed at its word. The budget document submitted by President Obama Tuesday regarded it as a foregone conclusion. But the budget also included this section:
This MBS purchase program is widely credited with pushing down mortgage interest rates, which according to [Freddie Mac] reached an all time low of 4.71 for the average 30-year fixed-rate the week ending December 3, 2009.
Indeed, the spread between the 30-year commitment rate and the 10-year Treasury has narrowed from 260 basis points on January 7, 2009, to 133 basis points yesterday.
But over that time the mortgage commitment rate has traded in a relatively narrow band and fallen from 5.10% to 4.98%, while the 10-year treasury yield has risen from 2.50% to 3.65%.
The graph below (click to enlarge) shows the 30-year mortgage commitment rate versus cumulative Fed purchases since the program started in the beginning of 2009. So while it may be a stretch to suggest that mortgage rates have been “pushed down,” it is fair to ask how much higher they might be without the government intervention.
Not only is it a fair question, it is the question of the moment. Come March 31, the Agency MBS market is going to find out how it will perform without the government’s involvement (the Treasury has already quit its buying program). The Fed has already begun to wind down its weekly buying. For what it’s worth, the last several weeks the Fed has cut its buying pace in half, averaging about $12 billion in net purchases per week, down from about a $25 billion weekly average last summer and fall, and prices have been steady to somewhat higher.
The table below (click to enlarge) sets forth where the Fed has been buying in the mortgage coupon stack. Over 80% of the $1.16 trillion purchased to date has been in 5% coupons or below, with the majority (43.2% or $501.5 billion) in 4.5s. Interestingly, since the beginning of the buying program there has been little significant difference in price performance by coupon despite the Fed’s concentration in the lower coupons. As far as predictions go, our guess is no better than anyone else’s. But the evidence (particularly the strength in the higher coupons) seems to suggest that the market for Agency MBS is deep and liquid and waiting to see what happens when the Fed steps aside.
