Mortgage Bonds Continue To Gain Ground On Fed Purchases
01/06 02:31 PM
NEW YORK(Dow Jones)--Mortgage bonds guaranteed by Fannie Mae (FNM:$0.8426,$0.0226,2.76%) , Freddie Mac (FRE:$0.8407,$0.0207,2.52%) and Ginnie Mae gained further Tuesday, as the U.S. Federal Reserve continued to buy these securities in an effort to bring home mortgage rates down.
While the tally of the Fed's purchases won't be released until Thursday, market participants estimate the central bank will buy, on average, $3 billion to $4 billion a day to fulfill its pledge to snap up at least $500 billion over the next six months.
Average risk premiums on the outstanding mortgage bonds dropped nine basis points to 188 basis points from where they closed Monday, said Art Frank, mortgage rates strategist at Deutsche Bank (DB:$38.09,00$-0.83,00-2.13%) .
This adds to the already significant tightening seen since the Fed in November announced it would buy both mortgage bonds and agency debt. Before then, risk premiums averaged around 280 basis points. Still, analysts say they will have to fall further to bring 30-year fixed mortgages rates to 4.5% - a goal policy makers are thought to be targeting.
Lower risk premiums on such bonds often translate into lower mortgage rates for homeowners. In fact, the 30-year fixed-rate mortgage rate has dropped sharply since the Fed first announced the program in late November. Such drops in risk premiums can be offset by rising long-term rates on Treasurys, as seen Monday and Tuesday, if the move to higher yields gathers momentum.
Deutsche Bank's (DB:$38.09,00$-0.83,00-2.13%) Frank estimates, however, at minimum the Fed's purchases will help keep mortgage rates around 5% for borrowers with good credit. "The Fed is keeping mortgage rates lower than they would otherwise be," he said.
Mahesh Swaminathan, mortgage strategist at Credit Suisse (CS:$28.83,00$-0.66,00-2.24%) , said he reckons that mortgage rates will reach 4.75% for 30-year fixed-rate mortgages that qualify for Fannie, Freddie and Ginnie guarantees "sooner rather than later."
That's because the Fed came out swinging early in January rather than easing into the program with more scattered purchases, he said.
Market participants also point out the Fed has bought issues across the board, avoiding any dislocations in the market.
"The bottom line is that the market needed evidence that the Fed is here for real and they will stay the course and they've demonstrated that they will," Swaminathan said.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com
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01-06-091431ET
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