The Federal Reserve on Monday started its latest unconventional program to boost the economy by focusing on the housing market.
The Fed plans to buy back as much as 1/9th of the outstanding bonds sold by housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae and backed by U.S. mortgages, to drive down mortgage costs. The aim is to provide incentive for buyers to return to the housing market or cut monthly payments on existing home loans.
The New York Fed began buying mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie on Monday, part of a program of as much as $500 billion.
"They seem to be committed to getting interest rates on 30-year mortgages down to 4.50 percent, which is apparently a magnet for the market," said William O'Donnell, head of U.S. rates strategy at UBS in Stamford, Connecticut.
The MBS program has already had a significant housing market impact -- mortgage rates dropped dramatically in anticipation of the purchases after they were announced on November 25, and there was a record jump in mortgage applications.
The picture improved further on Monday after the purchases began, with the premium paid on mortgage debt over safe-haven U.S. government debt narrowing sharply.
Nicholas Strand, a manager with the mortgage strategy group at Barclays Capital in New York, noted overseas investors, historically key buyers of Fannie and Freddie debt, are still waiting on the sidelines as they gauge how the measures will work.
The MBS program is the latest in an alphabet soup of unconventional policy measures to support financial markets and the U.S. economy, with interest rates around zero.
Janet Yellen, president of the San Francisco Federal Reserve Bank, said on Sunday the MBS program "could provide significant support to the housing sector."
Recovery of the housing sector is widely seen as a prerequisite for a turnaround in the economy's fortunes. With this in mind, the Fed has set a goal of buying $500 billion in mortgage-backed securities by mid-2009. That equals a ninth of the agency MBS market, which is roughly $4.5 trillion in size.
Current coupon 30-year agency MBS yielded 195 basis points over a blend of five- and 10-year Treasuries on Monday, compared with 208 basis points on Friday.
Source: Reuters
The Fed plans to buy back as much as 1/9th of the outstanding bonds sold by housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae and backed by U.S. mortgages, to drive down mortgage costs. The aim is to provide incentive for buyers to return to the housing market or cut monthly payments on existing home loans.
The New York Fed began buying mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie on Monday, part of a program of as much as $500 billion.
"They seem to be committed to getting interest rates on 30-year mortgages down to 4.50 percent, which is apparently a magnet for the market," said William O'Donnell, head of U.S. rates strategy at UBS in Stamford, Connecticut.
The MBS program has already had a significant housing market impact -- mortgage rates dropped dramatically in anticipation of the purchases after they were announced on November 25, and there was a record jump in mortgage applications.
The picture improved further on Monday after the purchases began, with the premium paid on mortgage debt over safe-haven U.S. government debt narrowing sharply.
Nicholas Strand, a manager with the mortgage strategy group at Barclays Capital in New York, noted overseas investors, historically key buyers of Fannie and Freddie debt, are still waiting on the sidelines as they gauge how the measures will work.
The MBS program is the latest in an alphabet soup of unconventional policy measures to support financial markets and the U.S. economy, with interest rates around zero.
Janet Yellen, president of the San Francisco Federal Reserve Bank, said on Sunday the MBS program "could provide significant support to the housing sector."
Recovery of the housing sector is widely seen as a prerequisite for a turnaround in the economy's fortunes. With this in mind, the Fed has set a goal of buying $500 billion in mortgage-backed securities by mid-2009. That equals a ninth of the agency MBS market, which is roughly $4.5 trillion in size.
Current coupon 30-year agency MBS yielded 195 basis points over a blend of five- and 10-year Treasuries on Monday, compared with 208 basis points on Friday.
Source: Reuters
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