MBS questionsm let's learn togather!

1. a)No, they pay the same as any investor trading at the same time.  But because they have time, money, and patience, they focus their buying at times of widest spreads to treasuries, which, in a sense means they are buying cheaper or rather, getting better deals than those who buy out of necessity or with other temporal or financial constraints.

b) In a roundabout way, from the issuance of of treasuries.  good reading on their website.

2. Nothing that we all don't know already.  MBS has been weak, much weaker than is warranted by a dispassionate assessment of it's value from a purely objective point of view.  They are doing this because they, I, and many others, believe MBS has not only been too weak, but is too crucial a component of our potential economic recovery to not be performing better.  Their participation says "we think MBS needs more confidence and we are confident enough in them to help others realize that as well."

3. MBS market would continue to languish with prices being lower than ever compared to treasury prices.  This would continue to have negative impacts on liquidity for the mortgage market.  It would continue to be hard to get loans and rates could not push much lower.  Because of the integral piece the trillions of dollars of MBS play in capital markets, global economic health would have another hurdle to recovery.  Higher rates compared to where they "should" be means that mortgagors have less money to participate in an economic recovery.  Furthermore, higher rates mean homebuyers can afford less house, since a majority of buyers make their price decisions based on payment.  This adds to or keeps home values under pressure.  And many argue that an increase in home values is a crucial component of a complete economic recovery.

4. Nothing right now for a few reasons.  First of all, DEflation is a much bigger concern than INflation.  Quantitative easing is one of the only ways to combat deflation.  In other words, because of deflation, they need to be dropping money out of helicopters anyway, so why not do it in a market sector with a comparitively high level of benefit.  Moreover, the dollar would be much more damaged if the rest of the global economy is healthy.  But because we are learning day by day just how interconnected the global economy is, we see that the largest components thereof are suffering right along with us.  When China, UK, Germany, etc... have decreasing inflation, troubled equities markets, and are also lowering benchmark rates, it brings the playing field on which the dollar participates down down down.  So we can inflate our individual economy without being inflated on the global stage.

5. First of all, 500 bln is about the entire trade volume for the whole of 2008.  2nd of all, they could likely do this many times over especially with some reallocation.  3rd, think of it as a jumpstart.  If she ain't running after this, we either have to try to jumpstart again or get 'er towed in for more intensive maintenance.

6. no, absolutely not.  MBS had nothing to do with the bubble.  Remember that loans have to exist to underly MBS.  So if values are down, and guidelines are tighter, that keeps the lid on the bubble.  If anything, we are experiencing the opposite of a bubble and will continue to do so.

7. Both new and slightly old MBS.  whichever coupons they feel will be good "buy and holds."  been focused recently on 4.5's to 5.5's, but will likely shift down to 3.5's to 4.0's.  The breakdown of what they are buying and how much is published weekly on Thursdays.

Great answers, 5 stars!  I'd had a couple of those questions, too.

Those were all superb questions, Stephen!

And if you don't mind, Matt, I will be execising my rights of a mature artist and I will steal and regurgitate your answers as if they were my very own, exactly as I've been doing since a year ago when I first found you.

And I will continue to do the same with your credit cards, vehicles, and other things sure to infuriate you.

Matt,

You are simply one bald dude. I've thought of shaving my head since my hair is basically falling out anyway (even more so with the MBS/Lender spreads now days) but I think I'd have an ugly head.

How do you deal with it and why hasn't your wife left you? Were you bald when you met?

she prefers the bald.

It's great!