Thursday, September 17, 2009

The Impact on Mortgage Rates of the Fed buying MBS

by Bill McBride on 9/17/2009 06:20:00 PM

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets were basically flat at $2.14 trillion. This graph from the Atlanta Fed shows the breakdown in the assets (from earlier this month):

Federal Reserve Assets Click on graph for larger image in new window.

This raises an interesting question: What is the impact from Fed MBS buying on mortgage rates?

Earlier this year, Political Calculations introduced a tool to estimate mortgage rates based on the Ten Year Treasury yield (based on an earlier post of mine): Predicting Mortgage Rates and Treasury Yields. Using their tool, with the Ten Year yield at 3.39%, this suggests a 30 year mortgage rates of 5.36% based on the historical relationship between the Ten Year yield and mortgage rates.

Freddie Mac released their weekly survey today:

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.04 percent with an average 0.7 point for the week ending September 17, 2009, down from last week when it averaged 5.07 percent.
This made me wonder if mortgage rates have been running below projections while the Fed has buying MBS ...

Mortgage Rates and Ten Year Treasury So I updated the previous graph. Sure enough mortgage rates have been below expectations for a number of months (the last 5 months in blue triangles).

Although this is a limited amount of data - and the blue triangles are within the normal spread - this suggests the Fed's buying of MBS is reducing mortgage rates by about 35 bps.

Of course the Fed is also buying Treasuries - reducing the yield on the Ten Year Treasury - and that is another factor reducing mortgage rates (although Treasury buying is a much smaller amount and for different durations).

Federal Reserve Treasury PurchasesThe third graph shows a breakdown of Fed Treasury purchases by maturity. From the Atlanta Fed:
Decomposing the Fed’s purchases of Treasury securities by maturity shows a heavy focus in the four-to-seven-year and seven-to-10-year sectors, together making up half of all purchases so far.

But the last four Treasury purchases have been focused elsewhere, with the biggest purchases in the shorter end of the yield curve.
I think the impact on mortgage rates from the Treasury purchases is minor. This suggests to me that mortgage rates will rise by about 35 bps, relative to the Ten Year yield, when the Fed stops buying MBS.

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