The New York Federal Reserve released today a set of FAQs about the change in the Fed's reinvestment policy for agency MBS and debt securities.

Barclays Capital talked about their thoughts on the move in a report released today. The FAQ said that agency MBS purchases will probably be focused on newly issued agency MBS in the TBA market, even though the Open Market Desk might buy other agency MBS if market conditions warrant.

Barclays analysts said that only fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are considered eligible assets to purchase. These eligible assets cover, although not limited to, 30- and 15-year securities from these agencies. The ineligible assets are CMOs, REMICs, Trust IOs/Trust POs and other mortgage derivatives or cash equivalents.

This is why, as was generally anticipated, the Fed purchases will happen through the TBA market, in production coupons, according to the analysts. They noted that there was no data on the distribution among FNMA/FHLMC Golds/GNMA or 15-year/30-year mortgages. Analysts are still of the view that the predominant proportion of the reinvestment will happen in conventional 30-years, in the 3.5% and 4% coupons.

They also talked about the alternatives that the Fed has to facilitate settlement.  According to analysts, considerable fail issues occured over the $1.25 trillion purchase in 2009 to 2010. They think that Fed will try to stop such issues this time around, specifically given the 2% annual fails charge to go into effect early next year. 

The Fed, analysts said, can utilize dollar rolls to facilitate settlement.  The FAQs stated that even though purchases will be focused in newly issued agency MBS in the TBA market, other agency MBS can be purchased if market conditions warranted it. They interpret this to mean that the Fed has left the door open for specified pool purchases.  Presently, they said that the the Fed does not expect to use coupon swaps with regard to the reinvestment program.

Analysts also noted what the Fed said about when it will release its purchase amount each month. The Fed said it will release the amount on the eighth business day of each month, the Open Market Desk will publish a projection of purchases expected between the middle of the current month and the middle of the following month. The amount will be around equal to the amount of paydowns received from the Fed agency debt and MBS holdings during the period. If the actual paydowns vary from its expectations, the Desk will adjust the following month's purchases to reflect this.

Analysts also noted that the Fed will start its purchases of agency MBS on Oct. 3. It will be buying $10 billion of agency MBS between Oct. 3 and 13. On Oct. 13, the Desk will release planned purchases from Oct. 14 to mid-November. The Fed will be buying from the New York Fed's primary dealers. The transactions, which will occur frequently each month, will happen in the secondary market through a competitive bidding process. These deals will also be dependent on market conditions, including the following factors: supply/demand, liquidity and volatility.

For the complete copy of the FAQ, please click here.

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