Without usual policy tools at its disposal, the Fed again weighed heavily into mortgage and bond markets. At the close of its meeting Wednesday, The Fed announced an extension of its plan to buy up Fannie and Freddie-issued debt and mortgage-backed securities offered by the GSEs as well as Ginnie Mae (FHA-backed product) and detailed a long-rumored plan to start purchasing certain Treasury securities.
Conforming mortgage rates moved into record territory again this week. After falling to a new daily low average rate of 4.94% on Thursday, HSH’s weekly average for 30-year FRM conforming money also managed a 13-basis point dip to 5.07% + 0.28 points, while the overall average for fixed-rate mortgage money (expressed as HSH’s Fixed-Rate Mortgage Indicator) slipped back by seven basis points, landing at 5.62%. The FRMI’s 5/1 Hybrid counterpart moved backward by six basis points to 5.36%, while Federally-unsupported jumbo 30-year FRMs remained steady for the week.
The Fed originally announced a $600 billion mortgage support plan back in November 2008, with $100 billion available for GSE debt and $500 billion for MBS purchases. The plan kicked in in early January, and since then the Fed has been accumulating MBS at about $4 billion per day, with estimates that they have used up about $200 billion of the original $500 billion commitment. At such a pace, it’s easy to plot on a calendar just when that original commitment would come to a close — somewhere in May or June. At about $100 billion per month, and with an initial expiry in a month or two, we believe that the Fed’s new $750 billion represents an enduring commitment to this program at least until the end of the year and perhaps slightly beyond. The total of $1.25 trillion may very well mean that virtually all MBS originated this year will find a ready buyer, financial market stress or not.
While there was some anticipation that mortgage rates would fall sharply as a result of the program, we note that the Fed didn’t say that they were going to pick up the velocity of their purchases (although they well could). Rather, we think that they wished to signal to the bond market and consumers that rates would remain low and stable for the foreseeable future, and that there will be an entity that will support the good-credit quality mortgage markets.
In a surprise move, the Fed also announced that they would be buying up $300 billion of “longer-dated” Treasuries over the next six months in order to “help improve conditions in private credit markets.” We don’t think that this move was specifically aimed at lowering mortgage rates (although if that happens as well, they wouldn’t complain). Rather, with many commercial financing arrangements keyed off Treasuries, it appears that the Fed is hoping to lower the cost of business-related credit and spur both borrowing and lending.
In the months ahead, a huge cascade of new debt is going to be coming into the market at a time when demand could very well be finite, given the ongoing scarcity of capital. In the bond market, when supply overwhelms demand, interest rates have no place to go but up in order to hopefully coax reluctant investors into snapping up new debt. We believe that the Fed’s move yesterday was to inform the market that at times of high supply, there will be a “sponge” available which can absorb excess supply, thereby serving to keep interest rates from rising and promoting stability in yields. http://www.hsh.com/
