[Update 1: adds Barclays Capital commentary]
The Federal Reserve Bank of New York
plans to engage this week in mortgage-backed security (MBS) coupon swap operations.
The operations, which will go through the Fed's trading desk, are part of a move to settle billions of dollars in agency MBS purchases. The Fed concluded its $1.25trn in purchases
of agency MBS in at the end of March.
A coupon swap, as the Fed explains in a policy statement
, is a standard market transaction involving an agreement to purchase one agency MBS and a simultaneous agreement to sell a different agency MBS. The Fed's trading desk plans to swap unsettled Fannie Mae (FNM)
30-year 5.5% coupon securities (Fannie Mae 5.5) for other agency MBS available for settlement.
The Fed expects operations to begin tomorrow, with coupon swaps not expected to exceed the unsettled amount of $9.2bn in the Fannie Mae 5.5. The Fed also said the trading desk might continue to arrange dollar roll transactions as needed to facilitate settlement.
The rationale behind pursuing coupon swaps is a "relatively short supply" of Fannie Mae 5.5s, according to securitization research by Barclays Capital
mortgage strategist Nichlas Strand. The Fed may have run into difficultly taking physical delivery of these bonds. For example, BarCap noted, according to the Fed's data, $11.2bn of Fannie 5.5s were scheduled for April settlement.
"However, based on their CUSIP-level data, it appears that counterparties have been failing to deliver these securities and have forced the fed to roll [Fannie] 5.5s," Strand said in commentary today. "By selling [Fannie] 5.5s into the market and moving into other coupons, the Fed should be able to more easily take delivery of all of their outstanding purchases."
The Fed’s exit from agency MBS sparked investor fears MBS bond yield spreads to Treasuries may blow out again from recent historic tights, when the government withdraws its significant demand for securities. But the sky did not fall
in the wake of the Fed's exit, as HousingWire
's Linda Lowell recently noted.
About a month after the Fed's program ended, spreads were up by about 45 basis points (bps), partially due to a flight-to-quality unrelated to the Fed's program, according to recent market commentary
. But a coordinating rise in triple-A corporate spreads — which rose about 25 bps over the same period — indicates forces other than the end of the Fed's MBS demand are driving spreads higher.
Write to Diana Golobay
Disclosure: the author holds no relevant investments.