By Isobel Kennedy

NEW YORK (MNI) – The agency mortgage-backed securities market
continues to gain its footing after the large swings that occurred
following the Federal Reserve’s announcement of its massive stimulus
package last week.

After days of profit taking from money managers and hedge funds,
some buyers inched into the market Tuesday and that buying continues
Wednesday with some Asian accounts cited.

However, at the highs of the day some profit taking also set in and
that is a clear indication that no one is quite sure exactly where
values should be.

On the one hand, the Fed will surely be a big buyer of MBS. But on
the other hand, the recent flows proved that some large-sized money
managers were happy to sell into the bid. After all, it was a known fact
that money managers began overweighting the sector some time ago in
anticipation of a Fed-centric MBS buying program.

In terms of actual levels the market has come a very long way since
Fed fever began and both traders and investors want to know if those
levels can be sustained.

The 30-year MBS current coupon was last around 2.04% vs. 2.09% at
the close Tuesday. It opened at 2.057% and reached a low yield of 2.016%
this morning.

This security was yielding 2.36% on September 12 and rallied to
2.11% in response to the Fed’s buying program on September 13. It stood
at 2.57% before the minutes of the Fed’s August meeting were released on
August 21 and at 2.27% after Chairman Ben Bernanke made his speech in
Jackson Hole, Wyoming hinting at QE3.

The spread of the current coupon MBS to a blend of Treasury 5-year
and 10-year notes hovers around +81 basis points Wednesday morning after
settling around +84 Tuesday.

This spread stood at +113 bps before the Fed’s decision on
September 13 and at +120 bps after the chairman’s Jackson Hole speech.

In addition to watching the levels and spreads in the mortgage
market to ascertain an equilibrium level, market sources will also be
watching to see what happens to mortgage origination levels. It is
unclear if anything the Fed does will help more homeowners because
credit standards are so tight and the economy remains relatively

However, housing has become one of the bright spots in the American

Wednesday, August housing starts rose 2.3% to 750,000, short of the
770,000 expected but up 29.1% vs. August of 2011.

July housing starts were revised down to 733,000 from 746,000.

Also Wednesday, August existing home sales rose 7.8%, the biggest
jump in a year, to a 4.82 million rate which was the highest level since
May 2010 and 9.3% higher than year earlier.

Months of inventory were down to 6.1 in a month when inventory is
usually heavy.

The National Association of Realtors’ chief economist said by next
January, when inventories are thin, this could be down to around 5
months supply.

Stephen Stanley, economist at Pierpoint says the broad
interpretation of recent housing data is one of gradual improvement,
though the absolute levels of construction remain dismally low.

He adds, the market has a ways to go to get back to normal, but
“even home prices finally seems headed in the right direction, despite a
sag in the economy.

He thinks “demand for homes will presumably stagnate in the months
ahead if employment and incomes are not growing sufficiently.”

On a final note, we incorrectly stated one of the statistics the
Fed released last Thursday when its new buying programs were announced.
The following are the correct figures from the Fed:

— To make open ended purchases of agency MBS each month totalling
$40 billion; From September 14 to September 30, the pro rated amount is
$23 billion;

— To make purchases totally $45 billion each month in the Treasury
market until the end of December. This is an extension of their Maturity
Extension Program, or Operation Twist as the Street calls it, where the
Fed sells shorter dated Treasuries and buys longer dated Treasuries. The
Fed said all its programs will be analyzed at the end of the year so the
future of MEP is not clear at this point;

— Fed will continue to buy agency MBS each month with the proceeds
of prepayments made to its approximately $800 billion MBS portfolio.
Each month the Fed tells the markets how many prepayment related
reinvestment purchases it intends to make. They have been running as low
as $25 billion a month to as high as $37 billion a month recently;

— Fed said it expects its low rate policy to stay in effect until
at least the middle of 2015. It had been until at least the end of 2014

** MNI New York Newsroom: 212-669-6430 **