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Article by: Matthew Graham: Chief Operating Officer, Mortgage News Daily / MBS Live
The daily amount is down from a recent peak of $50 bln to $25 bln. So does that mean the Fed is only going to buy half as much MBS as it was buying 2 weeks ago? And if so, why aren’t prices tanking?
It’s important to keep in mind that the Fed’s announced buying targets are just that: targets. For instance, when the target was $50bln / day, they only bought $36.6 billion / day on average. They lowered the target to $40 bln for Monday, March 30th and only manged to purchase just over $20bln that day. Incidentally, MBS sellers were lined up and waiting to offload that $40bln! When the Fed only showed up for $20bln, prices quickly tumbled (which is exactly what many a mortgage company had been clamoring for due to margin calls and general volatility).
The Fed quickly lowered their daily target to $30bln and subsequently continued buying just over $20bln / day on average ($22.489 bln, to be precise). Throughout last week, there was a noticeable correlation between the Fed’s willingness to buy and the market’s trading levels. The closer 2.5 UMBS prices were to 104, the less likely the Fed was to max out its operational allotment. Conversely, as prices fell toward 103, the Fed bought bought more of its scheduled amount (Wednesday afternoon was the lowest point of the week for MBS prices and also the only time the Fed maxed out its scheduled maximum buying amount). Thus, they did a great job of keeping prices in a narrower range, and at less insane levels than the 105+ seen in the previous week.
So now that they’ve lowered the daily target to $25bln, are they really buying less? Or are they just adjusting to the prevailing level of supply required to keep prices in a relatively high, stable range? Odds favor the latter, although it’s interesting to note that the Fed once again maxed out its buying capability by scooping up $5.5 bln in today’s first UMBS 2.5/3.0 operation. Maybe they’re trying to stick closer to 104 vs 103? We’ll keep an eye on this as the week progresses.