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Wells Fargo on Fed Allocations Post QE3

Having two weeks of data on the Federal Reserve's gross purchase commitments after it announced its third round of quantitative easing, investors have been able to get a feel of how the agency's new purchase allocations across the agency MBS sector are.

In a report released Friday, Wells Fargo analysts reviewed the Fed's three different time frames of gross purchase activity. They are the following: the first two weeks of QE3, the two weeks leading up to QE3 and the time since inception, which spans October 2011 to August 2012.

Wells Fargo reported that under QE3, the conventional 15-year sector gained 16% of the gross commitments versus 12% in the two weeks leading up to QE3 and 10% since inception.

Meanwhile, analysts said that Dwarfs had about 63% of that allocation and nuggets took in the rest. This signals a slight over-allocation to dwarfs versus the “since inception” 60%/40% split, analysts said.

The two weeks of QE3 purchases were split 75%/25% between the 2.5%/3.0% coupons. This went up in the 2.5% coupon allocation over last month at 67% and the average since May 2012 at 64%, they said.

Even though the proportion of all 30-years decreased, the percentage of GNMA II 30-years actually rose, Wells Fargo analysts said.

GNMA II 30-year QE3 purchase activity comprised about 15% of the amount allocated to the 30-year sector. This is an incremental rise versus the “since inception” and last month’s allocation levels, which were both at 13%, the firm said.

The allocation to GNMA Is has been at or near 5% “since inception,” and that did not change. Meanwhile conventionals dipped slightly.

The latest two weeks of QE3 purchases were split 55%/45% between the 3.0%/3.5% coupons. This shows a rise in the 3.0% coupon allocation over last month at 49%, with the aggregate September allocation split 50%/50%, analysts stated.

The GNMA II 3.0%/3.5% allocation was 66%/34% versus 48%/52% in the last few months. Analysts still think that the sizable GNMA II 30-year 3.0% and 3.5% coupons could be a key focus for the Fed. 

Additionally, conventional 15-years likely will continue to see an uptick in Fed purchases with the production coupon 2.5%s comprising the most commitments. analysts said.

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