As the Federal Reserve prepared its first monthly report on liquidity programs, the central bank continued buying up agency mortgage-backed securities (MBS) in an effort to promote the mortgage market from the secondary side down. The Fed bought up $54.67bn of MBS in the week ending June 10, up nearly 100% from last week’s $27.68bn in gross purchases. The Fed bought $12.35bn of MBS from government-sponsored enterprise Freddie Mac (FRE), $40.69bn from Fannie Mae (FNM) and $1.63bn from Ginnie Mae. After selling $31.67bn — more than half of the gross purchases — the Fed’s net purchases totaled $23.01bn. The week’s purchases favored 30-year MBS at 5.5% coupons, with $30.66 settling this month. The Fed also bought $15.8bn of 30-year 4.5% coupons with $8bn to settle in June and the remaining $7.8bn settling in July. The Fed listed sales of $29.87bn in 30-year MBS at 5.5% coupons, which settle in July. The dollar amount and settlement month disparity between weekly purchases and sales might make weekly transactions appear unbalanced, but statements out of the Fed suggest a longer-term outlook puts the figures into perspective. “The Federal Reserve determined that supporting the mortgage-backed security ‘dollar roll’ market promotes the goals of the mortgage-backed securities purchase program,” Fed officials said earlier this week in the report on its liquidity programs. Dollar rolls are where the seller — here the agencies — sells the MBS now under an agreement to buy it back in the future at a lower price. “Dollar roll transactions,” the Fed added, “which consist of a purchase of securities combined with an agreement to sell securities in the future, provide short-term ?nancing to the mortgage-backed securities market. Because of principal and interest payments and occasional delays in the settlement of transactions, the Federal Reserve also has some uninvested cash associated with the mortgage-backed securities purchase program.” Despite the disparity between sales and purchases at times, the Fed’s balance sheet tends to adjust. This week, for example, the MBS sales were more than half the dollar amount of purchases. The Fed’s balance sheet is down $40.53bn from last week, regardless of the differing settlement months of the sales and purchases. The balance sheet now totals $2.02trn in the week ending June 10. It’s up $1.5trn from the year-ago week ending June 11, 2008. The Fed holds a total $427.42bn of MBS. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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