FED Announces $750 Billion More and Poof!... MBS Prices Surge, Rates Drop

'Rambo Fed' Will Buy Treasuries To Combat Crisis (Bloomberg, 03/19/2009)

"Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11."

And here's a snapshot of what happened in the Agency MBS market:

Fannie Mae 4.5 coupon


Rates improved by .125% to .25% yesterday afternoon.

A Perspective Behind The FED's Plan To Lower Mortgage Rates, aka The MBS Bailout

In his most recent post, Brad Setser doesn't specifically address the FED's recent action in the Agency MBS market (remember the FED's $500b MBS purchase program?), but he does provide some great analysis of the numbers that are behind the FED's move.

From one of my new favorites, Brad's Follow The Money blog:

This is what a crisis looks like in the balance of payments data, 12/15/08

[Agency - Fannie, Freddie, Ginnie Mae]

"So much for talk that central banks are always a stabilizing presence the market. They clearly have destabilized the Agency market. The fall in demand for Agencies over the past three months — and most Agency demand has come from central banks until recently — has been sharper than than the fall in demand for US corporate bonds (think securitized subprime mortgages, the category “corporate bonds” in the BoP data includes asset-backed securities) after the crisis of last August."

"The Agency market is a rather important market. Increased lending by the Agencies offset the fall in demand for “private” mortgage-backed securities after the crisis last August. More recently, the absence of a “central bank bid” has kept
Agency spreads wide even after the US Treasury bailout of Freddie and Fannie. And that in turn has pushed the US to adopt other measures to bring down long-term mortgage rates. The Fed and the Treasury are literally now buying the Agencies that foreign central banks are selling. Action, reaction …"

Earlier in the same post, Brad points out "[foreign investors added] $400 billion in demand for safe dollar denominated assets [T-bills, T-bonds]. If that kind of monthly inflow is annualized it is a shockingly large number. It allowed foreigners to reduce their holdings of Agencies by close to $75 billion (including a $25 billion fall in short-term Agencies), their holdings of long-term corporate bonds by $13 billion and their holdings of US equities by $6 billion without causing any strain on the dollar."

According to Brad, that's $75b just in October. I'm sure numbers like these make the FED and Treasury nervous.