By Isobel Kennedy
NEW YORK (MNI) – The New York Federal Reserve said its gross
purchases of agency mortgage-backed securities in the week ended
December 6 totalled $11.8 billion and, after adjusting for its dollar
roll activity, its net purchases totalled $7.45 billion.
The largest purchases in the latest week were in Fannie Mae and
Freddie Mac 30-year “to-be-announced” TBA securities with 3.50% coupons
for December delivery. Those buys totalled $7.35 billion.
But the Fed also sold $4.350 billion Fannie Mae and Freddie Mac
30-year 3.50% TBA for January delivery.
By conducting the December/January 3.50% 30-year TBA roll, the Fed
is essentially adding liquidity to the Street to ease conditions heading
into the year-end.
In other words, the Fed will take delivery of mortgage bonds in
December that it might not have taken delivery of until January. In
doing so, the Fed is taking bonds out of dealer positions and putting
cash into the system at year end when it is most needed.
One market expert said that the Fed is “lending its balance sheet”
to the dealers for year end and that is what quantitative easing is
essentially all about.
And another notes correctly that this is the first roll activity
and the largest weekly purchase amount since the program was announced
in September.
MBS have been seeing mostly good buying all week although there
have been bouts of profit taking because 30-year spreads reached their
tightest levels since November 24 yesterday.
There is a wide variety of reasons for the buying but they can be
summed up as follows:
1) Low rates have been promised by the Fed until mid 2013. Under
the circumstances, banks and other investors are trying to pick up as
much yield as possible;
2) For the first time since July, monthly prepayments showed some
slowing in this week’s factor report. That means there is less fear that
MBS with high coupons will be prepaid or called away. It also means
there will be less production in the lower coupons. The Fed, of course,
continues to buy those lower coupons in its efforts to keep long rates
low and support the housing market, Mortgage prepayments also begin to
decline at this time of year due to seasonals. Few people decide to sell
homes or relocate at this time of year;
3) While the government’s revised HARP plan (now called HARP 2.0)
is attempted to help as many borrowers as possible, the Street clearly
does not think the plan will amount to a large spike in refinancings.
And whatever does show up will not occur for a few months as program did
not begin until December 1;
4) With the Fed supporting the rolls this week, some market sources
believe the Fed will become the new backstop bid if the rolls weaken.
This is a major aid on the financing front for dealers and investors;
5) The Street generally believes the Fed will be forced to embark
on QE3 at some point next year. It also believes, based on comments from
Fed officials, that the MBS market will be a prime area for further
asset purchases;
6) The European crisis has been a major focus for the financial
markets for months. Mortgage sources have noted that when interest rates
go down in Treasuries, market expectations of QE3 goes up. And if
interest rates goes up, there are buyers of MBS on the dip. The MBS
market also can, at times, be the beneficiary of the flight-to-quality
bid.
On September 21, 2011, the NY Fed said it would begin reinvesting
prepayments from its mortgage portfolio back into agency MBS. Prior to
that, the Fed was taking that money and putting it into the U.S.
Treasury market.
Next Tuesday the New York Fed will announce how many mortgage
prepayments it expects to receive in the next 30-day period. It will use
those proceeds to go back into mortgage-backed securities with lower
yielding coupons.
The November factor reports will be the basis for these
calculations and they showed only a modest rise in 30-year payments and
a rather surprisingly large dip in 15-year prepayments.
** Market News International New York Newsroom: 212-669-6430 **
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