MBS MORNING: Fat Tuesday

It has been a skinny time for MBS.  Day after day we were sure the government's explicit statements regarding MBS would be manifest themselves in grand fashion.  We were sure it would happen!  Then we HOPED it would happen.  Then doubt set in.  But today, the certainty with which we first perceived this outcome is vindicated.

Current MBS Price and Day Over Day Change:

FN 5.5 30YR MBS = 102-10  .... +1-27 (59 ticks)

The Fed announced not one, but two programs--either one of which would have a salubrious effect on MBS, but taken in conjunction could get us up further still.

Program 1: Purchasing GSE and FHLB MBS

Fed announced this AM that it will buy both MBS and other direct obligations from GSE's and FHLB's.  We've been talking ever since Frannie Bailout that the government could not possibly be happy with MBS spreads.  Certainly, after Paulson and Lockhart specifically referenced spreads and MBS weeks ago, we knew they understood how crucial low rates were to our recovery, and that they finally "got it."  Certainly they would now ensure that rates would go lower.  Or so we thought.   Granted, this won't be the definitive nostrum, but it's the best tangible action to back-up the intentions we were beginning to doubt.

As far as small potatoes, they will buy up to $100 bln in direct obligations (not MBS, but it helps unburden capital).  Now for the steak: They will select asset managers before year end to begin purchasing up to $500bln of MBS.  Yes, just MBS.  This may not be Agency TBA MBS, but it doesn't matter.  For every dollar of old conforming SISA stuff they buy, Frannie have another dollar to participate in the current TBA market.

Program 2: What A Talf!

The FRB is creating a Term Asset Backed Securities Loan Facility.  The premise is simple.  ABS issuance (think student, auto, credit card, and SBA loans) is down and spreads have been up.  This has exacerbated the credit crisis and is the reason you hear about people having a hard time getting consumer loans.

Under this program, the FRB of NY will lend up to $200bln secured by existing ABS.  The treasury will absorb the first $20 bln of any losses which will further decrease risk on the secondary ABS market and certainly decrease spreads.

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By These Powers Combined: It's what we've been waiting for.  More to follow as it becomes pertinent.