(Updates with fresh levels, analyst comments, more background)
By Anusha Shrivastava Of DOW JONES NEWSWIRES NEW YORK-(Dow Jones)- Mortgage bonds guaranteed by Fannie Mae (FNM), Freddie Mac (FRE) 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, some 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 12 basis points to 185 basis points from where they closed Monday, said Art Frank, mortgage rates strategist at Deutsche Bank.
With the Fed buying these securities, other investors, including Asian investors and domestic fund managers who had been shying away from this market are also venturing back, market participants say.
The improvement in risk premiums 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 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, 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.
"If the Fed is aggressive, we will see 4.5% mortgage rates in the next few weeks," said Ajay Rajadhyaksha, head of U.S. fixed income and securitized products research at Barclays Capital in New York.
He notes the central bank's goal is to lower mortgage rates and "if it can do that by buying less than $500 billion, it will do that."
In its announcement in November last year, the Fed had said "purchases of up to $500 billion in MBS" would be conducted and were "expected to take place over several quarters."
With the Fed making these purchases in the mortgage-backed sector, Rajadhyaksha said, the bank has made clear that this asset class is among its favored ones.
"The U.S. government will essentially pick winners and losers and investors will buy the same assets that the U.S. government is buying," he said.
Other areas of the credit market that were under severe stress but have been stabilized with the Fed's support include the commercial paper market, which companies rely on for short-term funding. This market froze last year after investors became wary of lending to companies looking for financing. It was only after the Fed set up a program to buy debt directly from these companies that investors tiptoed back into the market and, eventually, lending rates also came down.
Furthermore, the Fed's buying of agency debt has boosted confidence in that sector, with yields plummeting. On Tuesday, Freddie Mac sold a $6.5 billion two part deal: the $3.5 billion five-year tranche sold to yield 2.621%, and the $3 billion two-year tranche sold to yield 1.565%.
-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=%2Bqik9XNnddWygkOruBi49A%3D%3D. You can use this link on the day this article is published and the following day.

Publié le 06 janvier 2009 Copyright © 2009 Dowjones