Federal Reserve MBS Purchases

December 30th, 2008 9:14 pm | by John Jansen |

The Federal Reserve announced the asset managers who will guide the Fed’s purchase of $500 billion of MBS. The purchases will begin early in January and will conclude by the end of June.  Here is a link to the FAQ on the topic at the Fed website.

There is one humorous question and response. The question asks if the purchases will expose the Fed to losses. In the answer the central bank states that credit losses are not a problem as FNMA and Freddic Mac guarantee principal and interest. Huh?

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  1. 12 Responses to “Federal Reserve MBS Purchases”

  2. By Tom Lindmark on Dec 30, 2008 | Reply

    They’ll officially announce the new guarantee just as soon as they can create some more TARP money.

  3. By Tom Lindmark on Dec 30, 2008 | Reply

    They plan to officially announce the new MBS guarantee program as soon as they can create some more TARP money.

  4. By Bond Girl on Dec 30, 2008 | Reply

    One would think that the Fed should be able to hire some in-house types for a $500 billion program.

  5. By Joe on Dec 30, 2008 | Reply

    Nationalizing fannie/freddie and not guaranteeing their debt was a truly boneheadedway to split the baby.

    This is interesting reading, but $20B / week for 6 months is heck of a lot of GSEs. It’ll be fun to watch.

  6. By James Hymas on Dec 31, 2008 | Reply

    As far as I can tell, there will be no duration hedging performed as part of the deal.

    Are there any views floating around as to what this might do to the overall level of duration hedging related to the MBS market? And what the implications for yield curve shape going forward might be?

  7. By Guest on Dec 31, 2008 | Reply

    James, pardon me if this is common knowledge, but being a novice participant in a less sophisticated fixed income environment (Canada), here’s what I figure:

    Negative convexity of MBS inspires fixed receiving, thus driving spreads lower. Now, as dealers sell their agency MBS to the Fed, they will presumably unwind their convexity hedges. That is, swap spreads in the long-end should widen. It’s no surprise then that since the 500B buy back program was announced in late-November, 30yr swap spreads have widened a tidy 60bps.

  8. By John Jansen on Dec 31, 2008 | Reply

    I think that more of the hedging of MBS takes place in the 5 year/10 year part of the curve rather than the 30 year sector.

    The widening (normalization) of 30 year spreads resulted (I think) from the completion of deleveraging and portfolio repair.

    Anyone who received swaps 50 basis points and 60 basis points or any basis points rich to benchmark Treasury paper did so because they were compelled to do so and not because they wished to do so.

    It aint over till its over and with the price action signaling the end of a trade the animal spirits are alive and have pushed 30 year spreads back into positive territory.

  9. By Phil on Dec 31, 2008 | Reply

    John, do you agree that eventually Fed money will flow into munis? If so, what’s the best way to play this?

  10. By javamaan on Dec 31, 2008 | Reply

    more important q. Can go start a small fund and become a investment manager and use this facility?

  11. By James Hymas on Dec 31, 2008 | Reply

    I’ve seen a statement in another blog (Dec 4):

    Credit spreads on corporate debt have generally made yet another explosive move higher, as treasury yields have imploded in the recent blow-off move in government notes and bonds. Note in this context that we have once again a case of ‘unintended consequences’ at work here, as the implosion in treasury yields can be attributed directly to the Fed’s decision to montize $800 bn. in MBS and ABS, forcing duration hedging of large MBS portfolios.

    … but am unsure how seriously to take it. There’s a lot going on!

  12. By John Jansen on Dec 31, 2008 | Reply


    I hate to quote myself but read my piece from late yesterday on the corporate bond close which i will link to at the end of this comment.

    High grade corporate bonds have tightened dramatically in the last two weeks.

    I mention that I own LQD. I bought some the day before the FOMC statement and more in the minutes following that statement. My average cost is $94 ish. It is trading this morning with a $101 price.

    I have not noted the IG 11 but before the move to zero funds it was trading at 260 and it is was trading yesterday below 200.
    There are buyers of quality investment grade assets.

    In the interest always of full disclosure I am long some of the stuff I mentioned here. In the linked to article I detail what I own.


  13. By James Hymas on Dec 31, 2008 | Reply

    Oh sure, I realize that the end of the world has been postponed and corporates are fashionable again. The post I cited was dated December 4, when you noted:

    Corporate bonds are trading quite heavy today. The IG 11 is 275/278 which is about 16 wider on the day.

    I only kept the reference to corporates in the post I cited because it was hard to understand the paragraph without the phrase; and that post is – so far – the only direct commentary I have seen on the relationship between the Fed MBS buying programme & duration hedging.

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