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The following frequently asked questions (FAQs) provide further information about the Federal Reserve's secondary market operations in agency mortgage-backed securities (MBS). The Desk is currently directed to reinvest into agency MBS principal payments of agency MBS and debt that exceeds $35 billion per month. In addition, the Desk is directed to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. Further, the Desk will undertake small value open market transactions from time to time for the purpose of testing operational readiness to implement existing and potential policy directives.
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How will the Desk determine the amount of funds to reinvest each month and how will this be communicated? The Desk will calculate the agency MBS reinvestment amount by subtracting the monthly cap from the amount of expected principal payments from agency debt and agency MBS to be received during a calendar month. Agency commercial mortgage-backed securities (agency CMBS) principal payments continue to not be reinvested and will not be considered in the calculation of the reinvestment amount. The Desk will communicate its planned monthly reinvestment amount here, on or around the ninth business day of each month and will release tentative schedules of reinvestment operations twice a month here, on or around the ninth and the nineteenth business days. The tentative schedule will include information on the upcoming operation dates, times, security types (agency and coupon) and reinvestment amounts. The tentative operation schedule and parameters are subject to change if market conditions warrant or should the FOMC alters its guidance to the Desk.
When monthly principal payments from agency debt and agency MBS fall below the cap, will the Desk conduct small value agency MBS operations? Yes. The New York Fed undertakes certain small value open market transactions for the purpose of testing operational readiness to implement existing and potential policy directives from the Federal Open Market Committee (FOMC). For operational readiness reasons, the Desk plans to conduct small value purchases and sales in agency MBS in certain monthly periods in which principal payments fall below the cap. These operations will be conducted approximately every other month and in amounts of up to $150 million in a given month. The Desk may also conduct small value dollar roll and coupon swaps of unsettled MBS purchases.
Will the Federal Reserve conduct agency MBS dollar rolls or coupon swaps? The Desk may use dollar roll and coupon swap transactions if needed to facilitate settlement associated with its unsettled agency MBS purchases. A dollar roll is a transaction that generally involves the sale of agency MBS for delivery in one month with the simultaneous agreement to purchase agency MBS, with the same agency, tenor and coupon, for delivery in a different month. A coupon swap is a transaction that involves the sale of one agency MBS and the simultaneous purchase of another agency MBS, each with different agencies, coupons, and/or tenors.
The Desk would conduct dollar roll and coupon swap transactions via Tradeweb, a commercial trading platform. Transactions conducted over Tradeweb would be executed through a competitive bidding process in line with standard market practices.
Will the Desk release operation pricing results? Yes. In order to ensure the transparency of its agency MBS transactions, the Desk, at mid-month for the prior monthly period, will continue to publish historical operation results. This information will include the transaction prices in individual FedTrade operations, dollar rolls, and coupon swaps as well as transactions related to small value exercises. In addition to the pricing information released each month, Section 1103 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that detailed operational results, including counterparty names, be released two years after each quarterly transaction period.
How are the System Open Market Account (SOMA) holdings of agency MBS reported? Agency MBS transactions are reported after settlement occurs on the H.4.1. statistical release titled "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks." This report also includes information on total outstanding commitments to buy and sell MBS in Table 3 entitled "Supplemental Information on Mortgage-Backed Securities." Trade settlements may occur well after trade execution due to agency MBS settlement conventions. The New York Fed also publishes on a weekly basis detailed data on all settled SOMA agency MBS holdings. Any change in the composition of these reported holdings over time is a function of principal payments, outright purchases and sales, CUSIP aggregation, dollar roll, and coupon swap activity.
What is CUSIP Aggregation? CUSIP aggregation is a process through which a number of existing MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae with similar characteristics, including uniform agency backing, coupon, and original term to maturity, are consolidated into a larger pass-through security. The aggregated CUSIPs are similar to those agency MBS being consolidated, except that the aggregated CUSIP represent groups of agency MBS, which themselves represent groups of residential mortgages that conform to specified requirements. The cash flows from the underlying agency MBS provide the cash flows for the aggregated CUSIP. Additional information about CUSIP Aggregation can be found on the Agency MBS CUSIP Aggregation FAQ page.
In a word: YIELD. Yield is the rate of return paid on that bond over time. There are multiple different types of bonds, and each bond has a certain yield that it pays. You will sometimes hear us refer to yield as "coupon" or "issue." As you might guess, the higher the yield, the more the buyer will make over time, so the more the buyer is willing to pay. For instance, if an MBS with a 3.0% yield costs $104.50, the investor pays $104.50 for the ability to collect 3.0% interest on $100.00. Conversely, yields that are low enough may have prices under Par (100.00), meaning that investors could buy $100.00 worth of MBS at a discount. Bottom line, the higher the coupon of MBS, the higher the price will generally be.
For this same reason, when considering only one coupon (you might find it easier to think of it as "if the coupon stays the same") and the price is going higher, then the yield for the investor goes lower (because they're paying a higher price for the same coupon yield). This is what we mean when we say "as price goes up, yields go down," which is a different concept that "higher yielding coupons fetch higher prices." This can be a bit of paradox for some, but if it doesn't make sense at first, try to separate the two different approaches mentioned above:
2. In this case, we're looking at one specific MBS coupon. The coupon doesn't change, but the price does. As the price moves higher and lower over time we're noticing that investors are paying more or less for the same coupon yield. Thus if prices for a particular coupon are moving higher, yields are moving lower.
The first, and generally the most important step when generating loan pricing for each note rate is to calculate its optimal execution. In other words, the MBS coupon rate that generates the maximum proceeds from securitization. Figure III shows a hypothetical example of the process for a loan with a 3.375% note rate.
Today is Class A Notification Day in the Secondary Mortgage Market. Class A MBS coupons consist of Fannie Mae and Freddie Mac 30 year loan notes. The July FN 4.5 MBS coupon has begun the settlement process and it's price seems to haven fallen fast!
TBA = To be AnnouncedIn the TBA MBS market, at the time a trade is made, buyers and sellers agree to a few specific terms like what coupon, the issuing agency (Fannie, Freddie, Ginnie), size of trade, and a buy/sell price....the actual pools of loans are NOT exchanged at the time of this commitment. Instead, the MBS buyer and the seller make an agreement to complete the transaction at a later date. In the MBS market this date is pre-determined; it is called SETTLEMENT DAY (clever name huh?). Agency MBS trading settles once a month. We can actually watch forward pricing as much as three months ahead.
Two days before the pre-scheduled settlement date, the MBS seller "notifies" the MBS buyer of the specific pools that they will deliver to satisfy the previously agreed upon terms of the trade.This is Fannie Mae's guidance:Forty-eight hours prior to settlement, pool information must be communicated to the Capital Markets Sales Desk's back office by phone (202-752-5384), facsimile (202-752-3439), or via EPN transmission. Delivery of pool information must take place by 3:00 p.m. eastern time. It is advisable that pool information is communicated early as phone lines, fax machines, and the EPN queues are extremely taxed as the 3:00 p.m. deadline approaches. If the transmission does not occur by 3:00 p.m., one day's fail will be incurred, despite the fact the information is residing in queue.Then the MBS buyer reviews the pool information to ensure the seller has delivered loans that meet the agreed upon terms. 48 hours later, after being deemed to within "Good Delivery" guidelines, pool purchase funds are wired and the trade is complete (it goes deeper...this is the outline).BUT WHY DO PRICES SEEM TO FALL WHEN WE ROLL FROM THE FRONT MONTH TO BACK MONTH COUPON?Today the front month is the July delivery coupon and the back month is the August coupon. Tomorrow the front month delivery coupon will be the August coupons and back month will be September. 041b061a72