This morning the Federal Reserve made another major move to unfreeze the credit markets. They announced a plan to buy up to $600 billion in mortgage-backed assets and up to $100 billion in direct loans from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. It will also set up a $200 billion program to support consumer and small business loans and will buy another $500 billion in pools of mortgages that are bundled and sold to investors.
This is a welcome move for a credit market that lacked buyers, freezing credit and causing interest rates to be abnormally high given other market factors. By purchasing mortgage debt, the Federal Reserve is bringing much needed liquidity to the market.
The Mortgage Backed Securities markets are obviously responding in a very positive manner this morning, currently the 5.5% coupon is up over 175bps and the 6.0% coupon is up over 122bps. This morning the rate on a 30 year fixed rate mortgage dropped to 5.5%, the lowest in 9 months.
There are buyers of mortgage backed securities again, led by the governments massive purchases that were announced today. Others should follow suit now because of restored confidence in those markets, and further supply and demand forces will drive Mortgage Backed Securities prices up and yields back down to where they should be.
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