Thursday, March 11, 2010

The Countdown: Federal Reserve MBS Purchases 98.4% Complete

by Bill McBride on 3/11/2010 05:10:00 PM

Some key points:

  • The Fed MBS purchases are scheduled to end on March 31st.

  • It will take a couple of months for some of these purchases to settle on the Fed's balance sheet (see: the discussion from SIFMA: "To-Be-Announced" Trading of Agency Passthrough Securities)

  • The coming increase in the Fed's balance sheet (and the expansion of the Supplementary Financing Program (SFP) over the same period) are related to the MBS settling on the Fed's balance sheet. Now that the short term liquidity facilities are finished - the balance sheet will increase by about $200 billion over the next couple of months as the remaining MBS settle. This expansion would result in an increase in excess reserves, and the almost $200 billion ramp-up in the SFP will counterbalance this increase. The Treasury apparently waited to announce this until the statutory debt ceiling was increased.

  • I expect the spread between mortgage rates and the 10 year Treasury yield to rise slowly over a few months by 35 to 50 bps after the Fed stops buying. Others - like the Fed's Brian Sack - thinks any increase will be much smaller until the Fed starts selling MBS. Those worried about an immediate 100 to 200 bps jump in mortgage rates can probably already relax! We will know in a few weeks ...

  • A key short term question (for April) is: Will any increase in mortgage rates be enough to seriously impact refinance activity? According to Freddie Mac Primary Mortgage Market Survey® (PMMS®) of lenders, qualifying "30-year fixed-rate mortgage (FRM) averaged 4.95 percent" last week. It seems refinance activity is fairly strong with mortgage rates at or below 5%.

    Here is the Federal Reserve balance sheet break down from the Atlanta Fed weekly Financial Highlights released today (as of last week):

    Fed Balance Sheet Click on graph for larger image in new window.

    Graph Source: Altanta Fed.

    From the Atlanta Fed:
    The balance sheet contracted $6.9 billion for the week ended March 3.

  • Holdings of agency debt and mortgage backed securities shrank $4.7 billion, and other assets declined by $2.2 billion.

  • The balance sheet is expected to peak during the first half of this year after the MBS purchase program is completed and purchases settle on the balance sheet.
  • Fed Balance SheetThe second graph shows the MBS purchases by week. From the Atlanta Fed:
  • The Fed purchased a net total of $10 billion of agency-backed MBS through the week of March 3. This purchase brings its total purchases up to $1.22 trillion, and by the end of the first quarter 2010 the Fed will have purchased $1.25 trillion (thus, it is 98% complete).
  • The NY Fed purchased an additional net $10 billion in MBS for the week ending ending March 10th. This puts the total purchases at $1.230 trillion or almost 98.4% complete. Just $20 billion more and three weeks to go ...

    The Fed's balance sheet released today shows "only" $1.029 trillion in MBS on March 10th. As mentioned above, the difference is the NY Fed announces the purchases when they contract to buy; the Federal Reserve places the MBS on the balance sheet when the contract settles.

    The countdown ends in 3 weeks, and I don't expect any fireworks ...