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Mortgage Investors Cheer as Federal Reserve Restarts Purchases

Mortgage Investors Cheer as Federal Reserve Restarts Purchases

(Bloomberg) -- Mortgage prices rose and spreads tightened Monday morning as investors responded favorably to the Federal Reserve’s weekend announcement that it will resume net purchases of agency MBS for the first time since October 2014.

As of 11 a.m. New York time, prices had surged across the entire conventional 30-year coupon stack, with the lower coupons -- the 2.5% and 3% -- easily besting their Treasury and swap hedges, buoyed in part by the fact those coupons will be the primary target of Fed purchases. The same outperformance was also seen in lower coupon Ginnie Mae II 30-year coupons.

Over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

-- Federal Reserve, March 15

The Federal Open Market Committee will come out of the gate strong, with $80 billion in mortgage bond purchases planned over the next four weeks alone. As the bank plans to not only grow its balance sheet of mortgages by $200 billion but also reinvest all roll-off from its current holdings back into mortgages (where previously that roll-off went into Treasury purchases), this implies about a $57 billion net increase in its MBS holdings by mid-April.

A quick “back-of-the-envelope” calculation would therefore see about four months of purchases, after which the central bank will continue to reinvest any roll-off from its agency MBS holdings back into mortgages. Keep in mind, though, as Wells Fargo MBS analysts led by Vipul Jain pointed out, that QE1 called for just $500 billion in MBS purchases yet ended with over $1.1 trillion.

Mortgage Investors Cheer as Federal Reserve Restarts Purchases

A primary concern coming into the year was that net supply is expected to increase by 26% over 2019. This concern can now be put to bed as with net supply of roughly $265 billion expected this year, the Fed’s $200 billion take down will leave little for private investors. In addition, where the private market was expected to need to absorb about $20 billion in monthly roll-off from the Fed’s mortgage balance sheet, that too has likely been removed from the supply/demand equation.

  • Christopher Maloney is a market strategist and former portfolio manager who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Christopher Maloney in New York at cmaloney16@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Andrew Kostic, Christopher DeReza

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