By Isobel Kennedy

NEW YORK (MNI) – The New York Federal Reserve bought $14.9 billion Agency
mortgage-backed securities in the week ended November 28 under its combined QE3
and monthly prepayment reinvestment programs.

The mortgage originators continue to sell 30-year “to-be-announced” or TBA
paper into the market and that is what the Fed continues to buy.

In the latest week, the Fed bought over $9 billion of Fannie Maes, Freddie
Macs and Ginnie Maes with 3% coupons fore delivery in January.

Due to the size of the Fed’s buying program under QE3 — $40 billion each
month — the Fed is careful not to disrupt the markets but creating supply
shortages.

For this reason, the Fed conducted $2 billion in the TBA dollar rolls in
the latest week. It pushed off taking delivery of securities in December by
selling $2 billion Fannie Mae 30-year securities with 3.5% coupons for December
delivery and agreeing to buying $2 billion of the same securities for January
delivery.

The agency MBS market continues to do fairly well on a daily basis except
on days where the Fed’s buying gets overwhelmed by selling from other areas.

This is what occurred late on Wednesday when lower coupon Fannie Maes
widened out because over $4 billion in selling from mortgage originators clashed
with profit taking from hedge funds and money managers as dollar prices reached
levels that prompted profit taking.

In general, however, dealers and investors continue to like agency MBS for
a longer term trade.

The mortgage strategy team at Credit Suisse, led by Mahesh Swaminathan,
said Thursday they remain overweight the MBS basis for the following reasons:

1)Favorable supply/demand technical;

2) Elevated but still reasonable prepayment speeds;

3) Contained volatility;

4) Attractive carry;

5) Levels are expected to improve as the Fed takes out an increasing amount
of the low coupon float.

While valuations are back to the cheaper end of the range since the Fed
announced the MBS QE3 on September 13, Credit Suisse says the market could
remain choppy until there is a consistent bid from the banks and/or until other
investors begin to focus on their investment needs for 2013 “in earnest.”

In their weekly research report, Credit Suisse says a modest pull back in
the level of rates could create the bank bid and other investors should begin to
focus on their 2013 needs in about two weeks.

–MNI New York Bureau; tel: +1 212-669-6434; email: ikennedy@mni-news.com

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