The Federal Reserve’s efforts to stabilize the agency MBS market have been critically important. In its absence, mortgages would have been much more costly, perhaps unavailable altogether. However, given the scale of the intervention, it caused some unavoidable dislocation. On March 12 and 13, a Thursday and Friday, the mortgage-treasury spread widened to approximately 160 basis points, from about 90 basis points only two weeks earlier. This was driven by investors unloading portfolios, originators selling their refinancing pipelines, and those with MBS positions compensating for the now shorter duration of these securities.
The Federal Reserve stepped in to stop the free fall on Sunday, March 15, announcing that it would purchase up to $500 billion in Treasuries and $200 billion in agency MBS. Spreads promptly snapped back by 50 basis points on the following Monday and Tuesday. By Wednesday, however, investors became nervous that this would not be enough and began heavy selling again, pushing spreads back out to 168 basis points.
The Federal Reserve stepped in again before markets opened on Monday, March 23, announcing that it would buy agency MBS and Treasuries in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial markets and the economy. This proved enough to steady the market, bringing
spreads back in by 50 basis points over the next five trading days.
The Fed’s efforts have been heroic and unprecedented. Its purchase of $292.2 billion of agency MBS in March amounted to 178% of the total amount of agency securities originated that month, easily exceeding any month during the last financial crisis. Now aware that the Fed will buy as much as needed to stabilize the market, investors will likely need the central bank to purchase less going forward. Indeed, its purchases have slowed in recent weeks.
**For informational purposes only, via Economic Focus for the week of May 18, 2020**
