UPDATE: Fed Bought $10.2 Billion Of Agency Mortgage Bonds
January 08 2009 - 5:16PM
Dow Jones News
The Federal Reserve bought $10.213 billion of mortgage bonds
guaranteed by Fannie Mae (FNM), Freddie Mac (FRE), and Ginnie Mae
in the first three days of its new program to support the housing
market, the central bank reported Thursday.
The Fed has pledged to purchase $500 billion, or possibly more,
of these bonds in the first half of the year, in an effort to push
down mortgage rates. This is only one of many programs the central
bank is juggling as it expands its role in the financial
markets.
The purchases in the first days of the program put the Fed on
track to buy the half-trillion dollars worth of mortgages in six
months when the program is scheduled to expire.
There was little reaction Thursday afternoon in the mortgage
bond market to the data, where the Fed's daily intervention had
already caused risk premiums, or spreads, to narrow. They tightened
another two basis points on Thursday, bringing to total narrowing
to 38 basis points for the week.
"People already knew the Fed was buying heavily," said Art
Frank, a mortgage strategist at Deutsche Bank.
Risk premiums on these bonds have narrowed as much 100 basis
points from their highs in November before the Fed announced its
purchasing program.
As a result, mortgage rates that homeowners pay also have fallen
from above 6% levels in November to 5.01% as of Thursday, according
to Freddie Mac.
Additionally, the extent of Fed purchases is expected to push
other investors, who had shied away from this market, to
return.
Most of the central bank's purchases were of mortgage bonds
guaranteed by Freddie. It bought $6.899 billion of Freddie bonds,
$2.864 billion of Fannie bonds, and $450 million of Ginnie Mae
securities.
Much of its buying was concentrated in the 30-year 4.5% and 5%
coupons, according to Fed data.
The central bank, over the three days, bought $3.45 billion of
4.5% coupon and $3 billion of the 5% coupon.
"They are targeting the current coupon," said Walt Schmidt, a
mortgage strategist with FTN Financial.
The current coupon, or that closest to par, is the mortgage bond
with a primary mortgage rate of 4% on its 30-year loans. Typically,
lenders add additional charges and fees to this primary rate to
come up with the final mortgage rate homeowners pay.
The limited supply of these 4% coupons forced the Federal
Reserve to expand its purchases to the next two higher coupons, of
which there is plenty of supply, Schmidt said.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071;
prabha.natarajan@dowjones.com
(Anusha Shrivastava contributed to this report.)
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