Thursday, April 23, 2009

Asset purchase programs Update

The Fed has been busy these last few weeks, acquiring its promised agency MBS in large quantities and jumpstarting its Treasury purchase program. By my calculations, total government asset accumulation totals $572 billion to date.

  • The Fed purchased $381 billion in agency MBS at roughly $30 billion a week (since the announcement to purchase an extra $750 billion in agency-backed MBS on March 18). At this rate, the Fed will buy the announced $1.25 trillion by December 2009.
  • The Fed acquired $65.2 billion in Treasuries bonds and notes, and $1.5 billion in TIPS since March. The Fed is buying the full length of the yield curve, maturity dates from 2009-2039. Interestingly, the Fed purchased TIPS last week. To me, further acquisition of TIPS would signal the Fed’s upward inflation bias – pulling out later than earlier.
  • The Treasury continues its smaller but still active MBS purchase program, holding $124.3 billion as of March 2009. The Treasury’s flow of MBS is reported only monthly and at a lag, so it may be holding more.
The Fed and Treasury efforts are translating into lower mortgage rates; the 30-yr conventional mortgage rate fell 0.43% to 4.82% since February. However, the downward momentum was discrete, occurring fully in the wake of the Fed’s announcement to buy Treasuries. Furthermore, prices fell 0.1% in March, offsetting some of the downward momentum on real mortgage rates. Price declines are likely to catch up and even surpass nominal mortgage declines, leaving real mortgage rates unchanged, perhaps even up.

In reality, the deflationary (disinflationary) scenario that is typical of a recession of this magnitude makes the > $1.55 trillion Fed and Treasury asset purchase programs (MBS and Treasuries) more like insurance against rising real rates than true stimulus in the housing market, and fiscal measures are key. It seems that the fiscal stimulus will provide a floor under the economy, so that with stable real mortgage rates and record price declines, home sales have a real chance of bottoming in a few months, if they have not already.

Rebecca Wilder

1 comment:

  1. Hey Rebecca,

    Your estimate for the duration of the Fed's MBS purchase program (through the end of the year) is on point with what we predicted. I think the impact of this program has been quite influential. Yet, what lies ahead for mortgage rates after the billions allotted for MBS runs out?

    What do you make of the TALF's slow start? In your opinion is it an issue of price discovery or an uncertainty of another government program with possible "late-game" rule changes?