Mortgage Investors Cheer as Federal Reserve Restarts Purchases

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.

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.

Posted on on 3/16/2020.