Fed Plan Causes Largest One-Day 10-Year Yield Drop Since '87

The Federal Reserve has made plans to buy another $750 billion of agency mortgage-backed securities, another $100 billion of agency debt and purchase up to $300 billion of longer-term Treasury securities, causing the benchmark 10-year Treasury yield to experience its largest one-day drop seen since 1987. The drop to roughly 2.5% from closer to 3% was the largest one-day decline in that security's yield since Oct. 20, 1987, according to Freddie Mac chief economist Frank Nothaft. "The Fed is now trying to influence not just the spread between private interest rates and Treasuries (through its mortgage-backed securities purchases, for example), but to pull down the entire spectrum of interest rates by driving down the rate on benchmark Treasuries," said IHS Global Insight chief U.S. economist Nigel Gault in a report on the Fed's move. The current coupon in the agency MBS market as of midday Thursday was "just a little tighter" than it had been the previous afternoon when the Fed's announcement was made Wednesday afternoon, but otherwise market conditions were largely unchanged, Art Frank, director and head of agency mortgage-backed securities research at Deutsche Bank Securities, told MortgageWire. Wednesday afternoon agency MBS had been "more than keeping up with swaps but not keeping up with Treasuries," he said. Mr. Frank said agency MBS at that time had rallied on the news without any huge volume. Ensuing investor activity was fairly modest with some servicer convexity-related buying but not to any large extent, he said.