Sectors mixed as Fed reaches milestone

By Julie Haviv

NEW YORK (Reuters) - Yield spreads on Fannie Mae and Freddie Mac U.S. mortgage-backed securities tightened against Treasuries on Thursday, while "federal agency" debt ended mixed as upcoming front-end supply weighed on the sector.

The Federal Reserve reached a milestone with its agency MBS purchases in the latest week, topping $1 trillion.

The Federal Reserve's regular buying has been the biggest positive for agency MBS and agency debt securities, but the purchase programs have inflated the prices of some securities to levels that some investors deem unappealing.

"The Fed is now the big gorilla in the MBS market," said Didi Weinblatt, vice president of taxable fixed income portfolios at USAA Investment Management Company in San Antonio, Texas.

"In my opinion, their purchases are bidding up prices to artificially high levels," she said.

Weinblatt manages $2.5 billion in assets.

The sector should cheapen when the Fed completes its agency MBS purchase program at the end of the first quarter of 2010, she said.

"The Fed's exit strategy from this purchase program and from the myriad of other programs the government has put into place will have an enormous impact," she said.

The yield premium on Fannie Mae MBS paying 4.50 percent interest compared with the 10-year Treasury note tightened to 0.668 percentage points on Thursday from 0.720 percentage points on Tuesday, according to Reuters data.

Agency MBS have richened so far in November after closing October with a yield premium of 0.811 percentage points.

That is sharply narrower than the end of last year when the yield premium was around 1.863 percentage point.

The Fed's purchases of agency MBS and agency debt so far in 2009 total roughly $1.007 trillion and $152 billion, respectively. Meanwhile, its $300 billion of Treasuries purchases has concluded. The purchases are part of the Fed's effort to lower borrowing costs.

The Fed has started to pull back and slow the pace of its agency MBS purchases, with buying decreasing from about $25 billion per week in mid-September to only $13.5 billion for the most current week ending November 11.

Active 15- and 30-year mortgage securities were 10/32 to 11/32 higher. Prices on 30-year 4.50 percent coupons were 10/32 to 11/32 higher. Bond equivalent yields on 30-year 4.50 percent coupon MBS ranged from 4.022 to 4.159 percent.

Prices on 30-year 5.00 percent coupons were 10/32 to 11/32 higher. Bond equivalent yields on 30-year 5.00 percent coupon MBS ranged from 3.456 to 3.655 percent.