Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates tumbled relative to Treasuries after the Federal Reserve said it will reinvest proceeds from past purchases of housing debt into the bonds.
Fannie Mae's current-coupon 30-year fixed-rate mortgage securities fell about 0.15 percentage point to 1.07 percentage point more than 10-year U.S. government debt as of 2:40 p.m. in New York, the largest drop since March 2009, according to data compiled by Bloomberg.
The Fed is switching tactics after previously reinvesting into Treasuries the cash generated by its holdings of agency mortgage securities and debt. The central bank, which bought more than $1.4 trillion of housing debt through March 2010 to support the economy, plans to apply principal payments into home-loan bonds "to help support conditions in mortgage markets," the Federal Open Market Committee said today in Washington.
Fannie Mae and Freddie Mac mortgage bonds trading closest to face value were soon "gapping tighter on the surprise," Walt Schmidt, a mortgage strategist in Chicago at FTN Financial, said in a note to clients.
The Fed also said today that it will buy $400 billion of Treasuries with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.
