The Fed Steps Up in 1.5s
In a previous post, we noted that a key component of the implementation of unconventional monetary policy is the selection of coupons in its MBS purchase programs. As coupons in these securities occur only in steps of 0.5%, obtaining liquidity in new lower coupons is important in establishing a basis for mortgage rates to move lower. For example, 2.5% 30-year coupons were issued in 2013 and 2016, but never to the extent that liquidity was firmly established, limiting declines in the rate that borrowers paid at those times. This changed dramatically with the onset of the Covid-19 crisis. In March 2020 the Fed restarted its MBS purchase program after six years, including the 2.5% coupon, and this soon became the dominant coupon.
Since that time, the Fed has picked up its activity on this front. The GSE’s started issuing 2.0’s shortly after the crisis hit, and the Fed began buying them in May. Then 1.5% came on the scene this summer and this week sure enough the central bank validated this activity by adding them to their portfolios.
Can 1.0’s be far behind?