An Analysis of the Effects of the Federal

Reserve’s Latest Quantitative Easing Programs – QE3 and QE4 – on the

Mortgage Market

Naveen Nallappa

June 6, 2013

Abstract

This paper attempts to examine the effects of the Federal

Reserve’s latest quantitative easing programs on Treasury and

agency mortgage-backed security yields and United States

mortgage activity. It includes high-frequency event-study analyses

of Treasury and agency mortgage-backed security yields, the 30-

year Conventional Mortgage-MBS spread, and mortgage activity

surrounding event windows related to both QE3 and QE4. This

paper found that QE3 led to reductions in long-term Treasury and

agency MBS yields, while QE4 did not. The 30-year Conventional

Mortgage-MBS spread did not narrow during either QE3 or QE4.

Finally, neither QE3 nor QE4 spurred mortgage activity.

TABLE OF CONTENTS ACKNOWLEDGEMENTS 1

1. INTRODUCTION 1.1 THE GLOBAL FINANCIAL CRISIS 2 1.2 THE ENSUING RECESSION 6 1.3 QUANTITATIVE EASING 7

2. LITERATURE REVIEW 2.1 LONG-TERM TREASURY AND MBS YIELDS 8 2.2 PORTFOLIO BALANCE CHANNEL THEORY 11 2.3 MORTGAGE MARKET ACTIVITY 12

3. METOHDS AND DATA 3.1 HIGH-FREQUENCY EVENT-STUDY ANALYSIS 14 3.2 MAJOR ANNOUNCEMENTS 15 3.3 HYPOTHESIS TESTS 16

4. RESULTS 4.1 HIGH-FREQUENCY EVENT-STUDY ANALYSIS ON TREASURY AND MBS YIELDS 18 4.2 HIGH-FREQUENCY EVENT-STUDY ANALYSIS ON 30-YEAR CONVENTIONAL MORTGAGE-TREASURY SPREAD 21 4.3 HIGH-FREQUENCY EVENT-STUDY ANALYSIS ON MORTGAGE ACTIVITY INDICATORS 22

5. CONCLUSION 26

6. FURTHER ANALYSIS 27

7. REFERENCES 29

8. APPENDICES 8.1 APPENDIX A: CHARTS 31 8.2 APPENDIX B: TABLES 36

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Acknowledgements

I would like to thank Professor Arvind Krishnamurthy for providing me with

direction throughout the research process and for his patience during the

proofreading phase, Kanis Saengchote for his guidance with the mortgage

activity analysis, and Derek Song for his assistance regarding the high-frequency

event-study analyses.

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1. Introduction

1.1 The Global Financial Crisis

The global financial crisis of 2008 is considered to be the worst financial

crisis since the Great Depression. The crisis originated from the bursting of the

U.S. housing bubble in 2007. Over the past several decades, government policy

has been directed towards increasing the rate of home ownership in the U.S. In

response to concerns that lenders were not providing loans to individuals from

certain neighborhoods, Congress passed The Community Reinvestment Act of

1977 in order to help low-income individuals get home loans. This was the first

step in encouraging lenders to assist people in purchasing a home regardless of

their credit worthiness. In 1992, the government enacted a law that required a

“reasonable portion” of Fannie Mae and Freddie Mac’s mortgage purchases to be

from the low-income group. Four years later, the government stated that at least

40%, which was later pushed to 56%, of the GSE’s mortgage purchases should

have been mortgages made to the “underserved population.” These laws

encouraged mortgage originators to lower their loan standards, spawning the

term “subprime lending” in the process. This made it easier for individuals with

poor credit histories and low incomes to pursue a mortgage. As can be seen from

Chart 1, homeownership rates rose steadily between 1996 and 2004 before

falling considerably during the global financial crisis. Furthermore, home prices

rose dramatically between 1993 and 2007 as seen in Chart 2.

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A housing bubble in itself would not have been enough to cause the global

financial crisis. However, large financial institutions had a large stake in the

health of the housing market in the form of mortgage-backed securities. A

mortgage-backed security represents a claim on the future cash flows, in this

case the mortgage payments, from a mortgage loan. Mortgage-backed securities

have been in existence for several decades as Ginnie Mae first issued one in

1968 and Fannie Mae first issued one in 1981.

In order to create mortgage-backed securities, financial firms take a pool

of mortgages and separate them by their level of risk. Each tranche is associated

with a given level of risk, and expected yield, with the tranche with the safest

mortgages providing the lowest yields, and the tranche with the riskiest

mortgages providing the highest yields. If some mortgages default, the losses are

first accrued by those investors who purchased the lower tranches of the

security. As mortgages pile up, investors who purchased the safer tranches also

begin accruing losses. Chart 3 briefly walks us through this securitization

process.

While the cause is uncertain, the mortgages that served as the foundation

for the mortgage-backed securities that these financial firms were creating and

trading were of a lesser quality. Individuals with poor credit histories and low

incomes began holding a greater share of the outstanding mortgages (see Chart

4). Naturally, this made the overall pool of mortgages riskier. This would not

necessarily have been a problem had financial firms properly priced the risks

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associated with bundling subprime mortgages; however, this was not the case.

While financial institutions priced the risk of individual mortgages defaulting, they

did not price the risk of a systemic housing crisis. In their risk models, financial

institutions only addressed the issue of house price correlation in small areas. In

other words, if an individual in a Detroit suburb defaulted on her mortgage, then

there was a greater chance of another default occurring in that same suburb.

However, these correlations were assessed on a regional or county level and

were not created to handle nationwide default correlations (Silver 2012).

The issues within the risk models of these financial firms were only

exacerbated by the ratings that these mortgage-backed securities were given by

the independent rating agencies. According to the Financial Crisis Inquiry

Commission,

Even more difficult was the estimation of the default correlation

between the securities in the portfolio – always tricky, but

particularly so in the case of [Collateralized Debt Obligations]

consisting of subprime and Alt-A mortgage-backed securities that

only had a short performance history. So [Moody’s] relied on the

judgment of its analysts in the absence of meaningful default data.

The rating agencies’ failure to properly account for the correlations risks is at

least partially likely a result of the conflict of interest that exists in the current

ratings system. Financial firms pay rating agencies for their services. If a rating

agency isn’t willing to rate a certain security favorably, then the financial firm can

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threaten to take their business to a different rating agency. The rating agency

then acquiesces in order to keep its business. This could have resulted in

inaccurate ratings, which would have served to exacerbate the underlying issues

with the financial firms’ risk models.

As housing prices began falling, many of the poor credit history and low-

income homeowners began defaulting on their homes. While defaults were

expected, the high default rate was not. Furthermore, homeowners with relatively

healthy credit scores also began defaulting. As a result of the housing bubble

burst, default rates across the country were much more correlated than the risk

models expected. Even the safest tranches of the mortgage-backed securities

were resulting in losses, and the value of mortgage-backed securities thus began

to fall.

Leverage exacerbated the effects of the collapse in the value of mortgage-

backed securities. At the time, the U.S.’s largest investment banks were highly

levered, with leverage ratios exceeding 30x in 2005, 2006, and 2007 (see Chart

5). Leverage allowed banks to boost their returns on equity; high returns on

equity thus became the norm in the years preceding the financial crisis. However,

leverage also caused these banks to be highly susceptible to bankruptcy as a

result of small adverse movements in asset prices. The major investment banks

held large amount of mortgage-backed securities in the years leading up to the

financial crisis. As the value of these securities fell, concerns about these banks’

liquidity and solvency arose. These concerns manifested themselves in the sale

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of Bear Stearns and the collapse of Lehman Brothers in early and late 2008

respectively. Bank of America purchased Merrill Lynch, and the remaining two

independent investment banks – Morgan Stanley and Goldman Sachs – both

converted into a bank holding company. Thus, none of the five major United

States independent investment banks remained at the end of the crisis.

1.2 The Ensuing Recession

The crisis resulted in the global recession that began in December 2007

and took a sharp downturn in September 2008. In the United States, real GDP

began contracting in the third quarter of 2008. In the first quarter of 2009, capital

investment declined to record levels last seen in the post war period of 1957-58.

At the same time, the rate of decline in residential investment increased,

dropping 23.2% year-on-year. U.S. domestic demand fell 2.6% on a quarterly

basis. Income levels dropped substantially as the average male worker made

$32,137 in 2010 compared to an inflation-adjusted income of $32,844 in 1968.

Finally, a 2009 Bloomberg report stated that $14.5 trillion of value of global

companies had been wiped out since the beginning of the crisis.

The federal funds rate is the interest rate at which depository institutions

trade with each other on an overnight and uncollateralized basis. The federal

funds rate target influences the short-term interest rate that the banks charge

each other; the prime rate, which is the rate that banks charge their best

customers; and the interest rates paid on deposits, loans, and mortgages.

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At the beginning of the recession, the federal funds rate stood at 5.25%. In

response to the recession, the U.S. Federal Reserve began cutting the federal

funds rate. Table 1 depicts the federal funds rate cuts that the Federal Reserve

made since the beginning of the recession.

On October 29, 2008, the Federal Reserve cut the fed funds rate once

more by 50 basis points, bringing it down to 1.00%. The Federal Reserve was

slowly approaching the zero-lower bound – once the federal funds rate reaches

zero, the Federal Reserve can no longer make additional cuts in the rate to

stimulate economic growth – and realized that it had to take more action in order

to help dampen the recession and stimulate the economy. As a result of this, on

November 25, 2008, the Federal Reserve announced that it would purchase up

to $600 billion in agency mortgage-backed securities – those issued by

government-sponsored enterprises such as Ginnie Mae, Fannie Mae, and

Freddie Mac – and agency debt.

1.2 Quantitative Easing

As a result of the zero-lower bound, the Federal Reserve had to look

towards unconventional methods to stimulate the economy. In order to spur

economic activity, the Federal Reserve chose to try reducing long-term interest

rates through quantitative easing, which is an example of one of the

unconventional methods employed by the Federal Reserve. Quantitative easing

is the policy associated with the purchase of financial assets from banks and

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other financial institutions in an attempt increase the money supply and

consequently promote lending and increase liquidity in the financial markets. It

originally indicated the continued purchase of conventional open market

operations at the zero-lower bound, but it has evolved to mean unconventional

open market operations. It differs from traditional monetary policy as it is now

implemented by purchasing a significantly larger amount of assets. By

purchasing long-term bonds, the Federal Reserve raises the prices of the

financial assets bought, and consequently lowers longer-term yields.

Since 2008, the Federal Reserve has engaged in four rounds of

quantitative easing. The announcement dates and details of these rounds are

summarized in Table 2.

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2. Literature Review

Much has been written about the effects, both positive and negative, of

quantitative easing. The current literature primarily focuses on QE1, QE2, and

Operation Twist.

2.1 Long-term Treasury and MBS Yields

The first round of quantitative easing, QE1, has been shown to have had

an effect on long-term interest rates (Gagnon et al. 2011). Through an event-

study analysis of the Federal Reserve’s messages regarding a large-scale asset

purchase (LSAP) program, Gagnon identified significant reductions in interest

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rates on dates positively associated with QE announcements. The paper

concludes that the Federal Reserve’s QE1 resulted in a reduction of about 30 to

100 basis points in the ten year term-premium – the excess yield on long-term

bonds over those of short-term bonds – with noticeable effects in the markets for

mortgages, treasuries, corporate bonds, and interest rate swaps.

Krishnamurthy and Vissing-Jorgensen evaluate the effects of both QE1

and QE2 through an event-study analysis that looks at a variety of channels

through which quantitative easing works to affect yields. The researchers identify

six such channels: signaling, duration risk, liquidity, safety, prepayment risk,

default risk, and inflation. The paper argues that a given interest rate is a function

of each of these channels. Thus the real interest rate of a given asset is equal to

the expected return on a safe, liquid, short-term asset; inflation; and risk

premiums of all of the remaining factors – duration, liquidity, safety, prepayment,

and default – that are a function of the factors and the prices of the associated

risk. Thus, in order to examine how much QE affects interest rates in a broad

sense, one must evaluate the change in the interest rates on a variety of assets.

Krishnamurthy and Vissing-Jorgensen conclude that while the Federal

Reserve’s purchases of long-term treasuries and other long-term bonds

significantly lowered nominal interest rates on treasury bonds, agency debt,

corporate bonds, and MBSs, the magnitudes differed amongst bond types,

maturities, and between QE1 and QE2. For both QE1 and QE2, the researchers

found significant evidence for a signaling channel that reduced yields on all

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bonds, a long-term safety channel that reduced yields on medium- and long-

maturity safe bonds, and an inflation channel that implied larger reductions in real

rates than nominal rates. Additionally, three additional channels were found to

operate during QE1: an MBS risk premium channel lowered yields on MBSs, a

default risk channel that lowers yields on corporate bonds, and a liquidity channel

through which yields on the most liquid bonds rose. The main policy implication

pertinent to the analysis of QE3 and QE4 that will follow is that the Federal

Reserve’s asset purchases during QE1 and QE2 had the largest effect on

mortgage and lower-grade corporate credit when the purchases involved MBSs

as opposed to treasuries. The Federal Reserve’s QE3 and QE4 programs center

around the purchase of MBSs and the analysis to follow will test the proposition

put forth by Krishnamurthy and Vissing-Jorgensen.

Krishnamurthy and Vissing-Jorgensen also published a note, “Why an

MBS-Treasury swap is a better policy than the Treasury twist,” that evaluates the

benefits behind the purchases of MBSs in regards to the Federal Reserve’s

Operation Twist program. The argument suggests that the purchase of long-term

MBSs leads to a greater reduction in long-term MBS yields than does an equal

sized purchase of long-term Treasury bonds.

The researchers then argue that this is thus likely to better stimulate

economic activity than the purchase of Treasury bonds because of the larger

reduction in homeowner borrowing costs that come as a result of the MBS

purchases. The note also discusses the welfare costs associated with treasury

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purchases. By purchasing long-term treasuries, the Federal Reserve reduces the

supply of safe assets, thus driving up the scarcity price-premium and lowering

yields in the process. Treasuries provide economic benefit by serving as “high-

quality collateral and a long-term extremely safe store of value” (Krishnamurthy

2012). By reducing the supply of such assets, the economy is deprived of these

safe and liquid assets and welfare is reduced. Thus, by purchasing long-term

MBSs, the Fed can avoid the negative welfare costs associated with the

purchase of long-term Treasuries.

2.2 Portfolio Balance Channel Theory

Aside from the channels that have already been discussed, many

economists have pointed to the portfolio balance channel as another avenue

through which quantitative easing reduces longer-term interest rates. The

Markowitz portfolio theory serves as the foundation for the portfolio balance

channel. Markowitz suggested that an investor will always hold a portfolio that

maximizes her utility, which is a function of the expected return and expected risk

on each asset in her portfolio. The proportion of the investor’s wealth invested in

each asset, the weight on each asset, is determined by maximizing the investor’s

utility over all possible assets. These weights depend on the investor’s risk

preferences: how willing she is to trade risk for expected return.

Gagnon et al. (2011) suggest that a reduction in longer-term rates should

occur as a result of the riskiest assets being held by those who are less risk

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averse, and the decrease in the quantity of longer-term securities held by the

public. However, in his paper titled “Quantitative Easing: A Model-Free

Investigation of the Portfolio Balance Channel,” Daniel Thornton argues that this

risk premium interpretation is dubious. The risk premium depends on the

individual investor’s degree of risk aversion, which is not a function of the quantity

of certain types of securities in the market. Furthermore, the degree of risk is a

function that is positively related to the variability in the price of the security and

its duration. Thus, removing a quantity of a particular security should not reduce

the market risk associated with the remaining quantity of this security if neither

the individual investors nor the characteristics of the security are changed.

However, using Krishnamurthy and Vissing-Jorgensen’s findings regarding the

scarcity price-premium, we could conclude that while the risk profile of the

security does not change, investors pay a price premium on securities that are in

limited supply.

2.3 Mortgage Market Activity

The following analysis will also attempt to understand the effect of the

reduction in MBS yields on mortgage activity. Andreas Fuster and Paul Willen

discussed the effects of QE1 on mortgage activity in their paper titled, “$1.25

Trillion is Still Real Money: Some Facts About the Effects of the Federal

Reserve’s Mortgage Market Investments.” The two researchers suggest that the

purpose of QE1 was to decrease the spread between mortgage interest rates

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and other interest rates of similar duration. In the press release stating its plan to

conduct large-scale asset purchases, the FOMC stated:

Spreads of rates on GSE debt and on GSE-guaranteed mortgages

have widened appreciably of late. This action [LSAP] is being taken

to reduce the cost and increase the availability of credit for the

purchase of houses, which in turn should support housing markets

and foster improved conditions in financial markets more generally

(Federal Reserve 2008).

Fuster and Willen’s research led to three primary findings. First, the

QE1 announcement almost immediately yielded reductions in interest

rates for borrowers. The change in rates ranged from a decrease of 41

basis points to an increase of 10 basis points. Second, the QE1

announcement led to a large and immediate increase in borrower activity

in the primary loan market: the number of borrowers looking to refinance

mortgages rose by nearly 300 percent, this translated to a 150-250 point

increase in the number of originations. Furthermore, data courtesy of the

Home Mortgage Disclosure Act demonstrates that the time between

application and origination increased in the months after the QE1

announcement, suggesting that lenders were having difficulty processing

the greater number of applications in a timely manner. However, despite

the uptick in activity, the data shows little effect on search activity,

indicating that the QE1 announcement had little effect on spurring interest

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in home buying. Third, the QE1 announcement led to a disproportionate

increase in refinancing activity among borrowers with high credit scores.

For borrowers with FICO scores greater than 700, the number of refinance

applications that led to origination was anywhere between three and seven

times the rate prior to the announcement. While that number only doubled

for those with FICO scores below 700.

The Federal Reserve’s main objectives were to stimulate

consumption and stabilize house prices. QE1 was unlikely to have

stimulated consumption since the majority of borrowers who benefitted

from QE1 were highly creditworthy. Therefore, these borrowers were

unlikely to have been credit constrained, and thus, unlikely to have used

the cash freed up by the reduced mortgage payments to increase their

consumption spending.

3. Methods and Data

3.1 High-Frequency Event-Study Analysis

A high-frequency event-study analysis evaluates changes in financial

markets surrounding major, discrete announcements to measure the effect of

these announcements. The strong-form rational expectations theory suggests

that market participants have access to all of the relevant information available

and that they make optimal use of this information in forming expectations.

Jones, Lamont, and Lumsdaine (1998) and Fleming and Remolona (1999)

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provide evidence suggesting that one- or two-day changes in Treasury yields

around a major announcement should sufficiently provide an unbiased estimate

of the effect of the announcement on the yield curve.

3.2 Major Announcements

The first step in performing an event-study analysis is identifying the major QE3

and QE4 announcements. A search for “Federal Reserve” on The Wall Street

Journal’s website between September 1, 2012 and September 30, 2012 and

November 15, 2012 and December 31, 2012 returned 550 results. Each article

was evaluated for its relevancy to either QE announcement; those that were

unrelated to either QE announcement were discarded, leaving 30 articles. The

remaining articles were then used to identify five major signals that were either

easing announcements or that had the potential to materially affect the probability

of the announcement of QE3 and QE4. Two signals were identified for QE3,

while three signals were identified for QE4. Table 3 depicts these signals.

3.2.1 Major Announcements: QE3

The September 7, 2012 labor report miss likely increased the probability of

a QE announcement. With the Federal Open Market Committee’s (FOMC) next

meeting less than a week away, the market likely raised its expectations for

action. The September 13, 2012 QE announcement clearly affected the market’s

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expectations for easing, as the Fed unveiled another bond-buying program on

this day.

3.2.2 Major Announcements: QE4

John Williams’ November 23rd speech regarding the Federal Reserve’s

ability to increase accommodative measures likely increased the probability of a

QE announcement in the near future. Williams’ speech came nearly three weeks

prior to the FOMC’s December meeting date. The December 7, 2012 positive

labor report surprise theoretically decreased the likelihood of a new, additional

QE announcement; however, practically, one positive labor report surprise is

unlikely to have meaningfully affected the FOMC’s decision. Finally, the

December 12, 2012 QE announcement clearly affected the market’s expectations

for easing, as the Fed unveiled its latest bond-buying program on this day.

3.3 Hypothesis Tests

In order to evaluate the full effects of QE3 and QE4, there are multiple

hypothesis tests that must be conducted. Since QE3 involved purchases of

agency mortgage-backed securities, the primary hypothesis test will involve an

evaluation of long-term agency mortgage-backed yields. The null hypothesis is

that changes in the expected net supply of agency mortgage-backed securities

have no effect on agency mortgage-backed yields at any maturity. The

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alternative hypothesis is that a reduction in the net supply of agency mortgage-

backed securities causes agency mortgage-backed yields to fall.

According to the New York Federal Reserve’s “Responses to Survey of

Primary Dealers” September report, most primary dealers – financial institutions

that trade directly with the Federal Reserve – expected some sort of easing to be

announced in the FOMC’s September statement. Aside from expectations of the

likely extension of the forward guidance on the federal funds rate, some dealers

noted the possibility of an asset purchase program, while a few noted the

possibility of open-ended purchases (New York Federal Reserve September

2012).

QE4 involved the continued purchase of agency mortgage-backed

securities as well as the purchase of long-term Treasury bonds. Thus, a

hypothesis test must be run for both long-term agency mortgage-backed yields

and long-term Treasury yields. The agency mortgage-backed securities

hypothesis test is the same as the aforementioned test to measure QE3’s effect.

The null hypothesis for the Treasury bond test is that changes in the expected

net supply of long-term Treasury bonds have no effect on Treasury yields at any

maturity. The alternative hypothesis is that a reduction in the net supply of long-

term Treasury bonds causes long-term Treasury yields to fall.

According to the New York Federal Reserve’s “Responses to Survey of

Primary Dealers” December report, almost all primary dealers expected the

FOMC’s December statement to include an announcement regarding the

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continued purchase of Treasury securities following the conclusion of the Maturity

Extension Program, which is also known as Operation Twist (New York Federal

Reserve December 2012).

4. Results

4.1 High-Frequency Event-Study Analysis on Yields

The results of the event-study analysis are summarized in Tables 4

through 7. Hypothesis tests were run on both Treasury yields and agency

mortgage-backed securities yields for both QE3 and QE4 periods. In each

table, the first panel reports Treasury or agency mortgage-backed yields

as of market close on the day before, the day of, and the day after each

signal. The next panel reports the changes in yields for the event window

surrounding each signal. The third panel reports the unconditional

standard deviations of yield changes over one- or two-day periods as

methods for comparison. The final panel reports the statistical significance

of the yield changes in the form of t-statistics. One, two, or three stars

indicate changes that were significant at the 10%, 5%, and 1% level,

respectively. Charts 6 through 8 visually depict the yield activity

surrounding the QE3 and QE4 announcement windows.

As we can see in Table 4 and Chart 6 and 7, the changes in the 30-

year and 10-year Treasury yields during the two-day event window

surrounding the announcement of QE3 were the only two statistically

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significant changes in Treasury yields during this time period. 30-year

yields rose by 16.7 basis points (bp), with a t-statistic of 2.549, while 10-

year yields rose by 10.8bp, with a t-statistic of 1.685. Long-term Treasury

yields likely rose as a result of the Federal Reserve’s decision to purchase

agency mortgage-backed securities instead of additional long-term

Treasuries, thereby removing the possibility of additional long-term

Treasury purchases in the near term. The rise in yields suggests that the

market may have expected additional long-term Treasury purchases. Tom

Goodwin, Russell Indexes senior research director, stated on September

12, 2012 that, “The markets appear to have fully priced in the expectation

that Bernanke and the FOMC will announce a definitive direction on

further quantitative easing to conclude this week’s meeting” (Marketwire

2012). If the spike in Treasury yields occurred after the markets had

already priced the easing announcement in, then it is likely that the market

had expectations for further Treasury purchases. Furthermore, in its

September 13th statement, the Fed indicated that it would maintain “its

existing policy of reinvesting principal payments from its holdings of

agency debt and agency mortgage-backed securities in agency mortgage-

backed securities,” displaying its commitment to purchasing agency

mortgage-backed securities over long-term Treasuries (Federal Reserve

September 2012)

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As we can see in Table 5 and Chart 8, the agency mortgage-

backed yield analysis for QE3 is the most remarkable finding of the four

hypothesis tests. Agency mortgage-backed yields fell across the range of

agency mortgage-backed securities. Using Fannie Mae agency mortgage-

backed securities with a range of coupons between three and five percent,

I find that yields fell for each coupon level during the two-day event

window surrounding the QE3 announcement. Yields fell by an average of

10.3 basis points across the range of coupon levels during this two-day

event window. Furthermore, the yield on the Fannie Mae three percent

coupon security fell by 9.3bp during the one-day event window associated

with the September 7th labor report, suggesting that the disappointing

labor report released on the morning of September 7th materially affected

the probability of a QE3 announcement.

Similarly, as we can see in Table 5, yields on Ginnie Mae agency

mortgage-backed securities fell for coupon levels of three and three and

one-half percent during both the one-day event window surrounding the

September 7th labor report as well as the two-day event window

surrounding the QE3 announcement. These results suggest that QE3 did

have a significant effect on long-term agency mortgage-backed yields.

As we can see from Tables 6 and 7 and Charts 6, 7, and 8, none of

the changes in yields surrounding the signals and announcements related

to QE4 were found to be statistically significant. This could be a result of

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two forces: the market may have anticipated further easing from the Fed

or the marginal effect of a fourth round of easing may be statistically

insignificant.

4.2 High-Frequency Event-Study Analysis on 30-Year Conventional

Mortgage-Treasury Spread

The next step in the analysis is to evaluate the effect of the LSAPs

on the residential mortgage market. In its September statement, the Fed

indicated that its actions “should put downward pressure on longer-term

interest rates, support mortgage markets, and help to make broader

financial conditions more accommodative” (Federal Reserve September

2012). The previously mentioned event-study analysis found that agency

mortgage-backed yields meaningfully fell as a result of QE3. In order to

evaluate the effect of the yield reduction on the residential mortgage

market, I first evaluate the 30-year Conventional Mortgage-Fannie Mae

MBS yield spread in order to determine how much of the reduction in

yields is passed on to the consumer, and then look for QE-related trends

in the Mortgage Bankers Association loan data.

The 30-year Conventional Mortgage rate can be considered the

price at which a lender is willing to originate a mortgage, while the 30-year

Treasury yield can be considered the cost of a lender’s capital. In a simple

sense, the spread represents the lender’s profit on a mortgage. As the

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Federal Reserve implements its easing programs, MBS and Treasury

yields should, theoretically, fall. As MBS yields fall, lenders could originate

mortgages at lower rates since financial institutions and investors are

willing to buy those mortgages at lower rates. However, lenders could

instead continue to charge mortgage rates well above the secondary

market rate and reap the majority of the benefit associated with the yield

reduction due to quantitative easing. Thus, an analysis of the Mortgage-

MBS spread could provide an indication as to whether or not lenders are

passing on part of the benefits of lower secondary market rates to

consumers.

I conducted hypothesis tests in order to determine whether the

changes in the Conventional Mortgage-MBS yield spread were

meaningfully different during the QE3 and QE4 announcement windows.

The analysis included one-week event windows surrounding the QE3 and

QE4 announcements, as the market should have digested the QE

announcement within this time frame. While Chart 9 suggests that the

spread did narrow during both the QE3 and QE4 announcements, Tables

8 and 9 indicate that these movements were not statistically significant.

4.3 High-Frequency Event-Study Analysis on Mortgage Activity Indicators

The final step in the analysis is to evaluate the effects of the LSAPs

on domestic mortgage activity. I used ten Mortgage Bankers Association

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(MBA) indices In order to get an indicator of mortgage activity. The ten

indicators are described in detail in Table 10.

Table 11 shows the one-week changes in index activity surrounding

the seven major easing announcements, while Table 12 shows the

statistical significance of these one-week changes. These changes were

not evaluated for the three non-announcement signals that were identified

during the high-frequency event-study yields analysis, because a change

in the probability of MBS purchases will likely not effect mortgage

decisions on the consumer’s end. For example, Governor John Williams’

November 23rd comments likely didn’t change consumers’ likelihood to

apply for a mortgage purchase loan or refinancing.

According to Table 12, QE1 had a measurable, and statistically

significant – at the 1% level – positive impact on mortgage activity

indicators. During the one-week window surrounding the QE1

announcement, mortgage purchases and refinancing applications

increased considerably, with t-values of 5.166 and 5.436, respectively.

Fixed-rate mortgage applications also increased (t-value of 5.89), while

adjustable-rate mortgage applications did not change meaningfully.

Consumers were likely eager to lock in low mortgage rates, which is likely

why fixed-rate mortgage applications increased so much more than

adjustable-rate mortgage applications.

! 24!

During the one-week windows surrounding the formal QE1 launch

and QE1 expansion announcement, refinancing activity increased

considerably, with t-values of 3.537 and 3.765, respectively. Fixed rate

mortgagees also saw increases during both of these event windows, with

t-values of 5.206 and 3.610, respectively.

Aside from these QE1-specific increases in mortgage activity, the

Fed’s remaining monetary easing programs have proved to be ineffective

in spurring mortgage activity. QE2 through QE4, including Operation

Twist, all corresponded to statistically insignificant changes in the ten MBA

indices considered in this analysis.

QE1’s impact on mortgage activity can also be seen in the average

loan sizes reported by the MBA MBLS indices. Total average loan size (t-

value of 4.29), average refinancing loan size (t-value of 4.15), average

adjustable-rate mortgage loan size (t-value of 3.46), and average fixed-

rate mortgage loan size (t-value of 5.00) all meaningfully increased.

Average fixed-rate mortgage loan size also increased during the formal

QE1 launch and QE1 expansion announcement event windows, but not

nearly as significantly, with t-values of 1.79 and 1.65, respectively.

Interestingly, the formal QE1 launch also had a statistically significant

negative impact on the average adjustable-rate mortgage loan size. While

the reason behind this is outside of the scope of the current analysis,

consumers may have eschewed adjustable-rate mortgages for fixed-rate

! 25!

mortgages because they may not have expected rates fall much lower,

and that because they may have evaluated the that the potential savings

garnered by lower rates in the future did not offset the uncertainty

associated with adjustable-rate mortgages.

Interestingly, these findings are contrary to those proposed by

Fuster and Willen in their paper titled, “$1.25 Trillion is Still Real Money:

Some Facts About the Effects of the Federal Reserve’s Mortgage Market

Investments.” Fuster and Willen found that QE1 had little effect on search

activity, indicating that the QE1 announcement had little effect on spurring

interest in home buying. However, the MBA indices suggest that there was

a spike in home purchase and refinancing applications, indicating that

search activity must have increased. That said, further analysis should

focus on evaluating this claim based on the same data sets that Fuster

and Willen used before a definitive conclusion is made.

Finally, in accordance with research conducted by Krishnamurthy

and Vissing-Jorgensen, long-term MBS yields did in fact decrease during

the MBS-centric QE3 program. This long-term MBS yield decrease was

not observed during QE4, which corresponds to Krishnamurthy and

Vissing-Jorgensen’s conclusion, since QE4 did not involve additional MBS

purchases. A more detailed analysis can be conducted in order to

evaluate the direct effect of long-term MBS purchases on long-term MBS

! 26!

yields by isolating the effect of the MBS risk premium channel proposed by

Krishnamurthy and Vissing-Jorgensen.

5. Conclusion

In the latter half of 2012, the Federal Reserve announced and

began the implementation of two new easing programs: QE3 and QE4.

QE3 involved the purchase of agency mortgage-backed securities at a

rate of $40 billion a month. QE4 involved the purchase of long-term

Treasuries at a rate of $45 billion a month, on top of the QE3-related

agency mortgage-backed security purchases. By enacting these

programs, the Fed was hoping to “maintain downward pressure on longer-

term interest rates, support mortgage markets, and help to make broader

financial conditions more accommodative.” (Federal Reserve December

2012)

This paper found that QE3 led to reductions in long-term Treasury

and agency MBS yields, while QE4 did not. The 30-year Mortgage-MBS

spread did not narrow during either QE3 or QE4. Finally, neither QE3 nor

QE4 spurred mortgage activity as measured by the ten MBA indices

considered that spanned application activity as well as average loan size.

That said, it is worth noting that this analysis only attempts to

evaluate the visible effects of the two programs; it does not attempt to

evaluate the benefits of avoiding the counterfactual. There may have been

! 27!

significant adverse consequences had the Federal Reserve not committed

to QE3 or QE4. An analysis of this situation must be made in order to

definitively conclude whether or not the Federal Reserve’s quantitative

easing programs had a positive effect on the mortgage market.

6. Further Analysis

These findings, primarily the mortgage activity data, lead to

additional questions. While the MBA indices suggested that all programs

aside from QE1 had little effect on mortgage activity, there are a few other

data sets that could provide alternate perspectives. LoanSifter, Home

Mortgage Disclosure Act (HMDA), and Lender Processing Services (LPS)

are three sources of relevant data sets. LoanSifter provides data on rate

offers and search activity that come from the rate sheets provided by

lenders. Congress enacted the Home Mortgage Disclosure Act (HMDA) in

1975. It requires lenders to provide information about applications for

mortgage credit, including, but not limited to: an applicant’s race, income,

gender, occupancy status, amount and lien status of the loan, the location

of the property, and the action taken by the lender. The Lender Processing

Services, Inc. (LPS) data set has additional variables that cannot be found

in either the LoanSifter or HMDA data, including, but not limited to: amount

of the loan, the value and location of the property that secures the loan,

! 28!

the classification of the loan (prime or subprime), and whether the loan

has been packaged into a mortgage-backed security.

There is existing literature (Fuster and WIllen 2010) that analyzes

detailed loan data that can be found within these three data sets. Further

research regarding the effect of QE3 and QE4 on the mortgage market

should include an analysis of these data sets to evaluate macro-level

changes – meaningful changes in overall mortgage activity – as well as

micro-level changes – meaningful changes in mortgage activity for certain

demographic pockets of the population.

Additionally, the event-study analyses could have employed a

greater number of signals. Not only could months aside from September,

November, and December be evaluated, but other data sources could also

be used. Furthermore, a more comprehensive search for certain events,

such as Federal Reserve Governor speeches, could produce additional

signals.

! 29!

7. References

Federal Reserve Press Release: December 12, 2012. (n.d.). Board of Governors of

the Federal Reserve System. Retrieved March 20, 2013, from

http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm

Federal Reserve Press Release: November 25, 2008. (n.d.). Board of Governors of

the Federal Reserve System. Retrieved March 20, 2013, from

http://www.federalreserve.gov/newsevents/press/monetary/20081125b.htm

Federal Reserve Press Release: September 13, 2012. (n.d.). Board of Governors

of the Federal Reserve System. Retrieved March 20, 2013, from

http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm

Fleming, M. J., & Remolona, E. M. (1997). What Moves the Bond Market?.

Economic Policy Review, 3(4).

Fuster, A., & Willen, P. S. (2010). $1.25 Trillion is Still Real Money: Some Facts

About the Effects of the Federal Reserve’s Mortgage Market Investments.

Federal Reserve Bank of Boston, 10(4).

Gagnon, J., Raskin, M., Remache, J., & Sack, B. (2011). The Financial Market

Effects of the Federal Reserve’s Large-Scale Asset Purchases. Peterson

Institute for International Economics.

Housing Vacancies and Homeownership (CPS/HVS) - Housing Vacancies and

Homeownership - People and Households - U.S. Census Bureau. (n.d.).

Census Bureau Homepage. Retrieved March 10, 2013, from

http://www.census.gov/housing/hvs/

Jones, C. M., Lamont, O., & Lumsdaine, R. L. (1998). Macroeconomic news and

! 30!

bond market volatility. Journal of Financial Economics, 47(3), 315-337.

Krishnamurthy, A., & Vissing-Jorgensen, A. (2012). The Effects of Quantitative

Easing on Interest Rates: Channels and Implications for Policy.

Northwestern University.

Krishnamurthy, A., & Vissing-Jorgensen, A. (2012). Why an MBS-Treasury swap is

better policy than the Treasury twist. Northwestern University.

Measuring Market Expectations: Russell Indexes Show Market Anticipation &

Reaction to FOMC Monetary Stimulus. (n.d.). Marketwire. Retrieved April 8,

2013, from http://www.marketwire.com/press-release/measuring-market-

expectations-russell-indexes-show-market-anticipation-reaction-fomc-

1700827.htm

Responses to Survey of Primary Dealers: December 2012. (n.d.). New York

Federal Reserve. Retrieved April 23, 2013, from

www.newyorkfed.org/markets/survey/2012/December_result.pdf

Responses to Survey of Primary Dealers: September 2012. (n.d.). New York

Federal Reserve. Retrieved April 23, 2013, from

www.newyorkfed.org/markets/survey/2012/September_result.pdf

Silver, N. (2012). The signal and the noise: why so many predictions fail--but some

don't. New York: Penguin Press.

The Financial Crisis Inquiry Report. (n.d.). Financial Crisis Inquiry Commission.

Retrieved March 15, 2013, from www.gpo.gov/fdsys/pkg/GPO-

FCIC/pdf/GPO-FCIC.pdf

! 31!

8.1 Appendix A: Charts

Chart 1: Homeownership Rates

! Chart 2: Home Prices

!

!!!!!

! 32!

Chart 3: Securitization Process of Mortgage-Backed Securities !

!!Chart 4: Subprime Mortgages as Share of Total Mortgages

!

! 33!

Chart 5: Leverage Ratios for Major Investment Banks !

!!

Chart 6: QE3 & QE4 30-Year Treasury Yields

!!

2.4000!2.5000!2.6000!2.7000!2.8000!2.9000!3.0000!3.1000!3.2000!

9/3/12! 10/3/12! 11/3/12! 12/3/12!

30#Year(Treasury(Yield(

QE3(Announcement

QE4(Announcement

! 34!

Chart 7: QE3 & QE4 10-Year Treasury Yields

!!

Chart 8: 30-Year Agency Mortgage-Backed Security Yield

!!

1.4000!1.4500!1.5000!1.5500!1.6000!1.6500!1.7000!1.7500!1.8000!1.8500!1.9000!

9/3/12! 10/3/12! 11/3/12! 12/3/12!

10#Year(Govt(Bond(Yield(

QE3(Announcement

QE4(Announcement

0.5!

0.7!

0.9!

1.1!

1.3!

1.5!

1.7!

1.9!

2.1!

2.3!

2.5!

9/3/12! 10/3/12! 11/3/12! 12/3/12!

30#Year(Mortgage#Backed(Security(Yield(

FNCL!3! FNCL!3.5! FNCL!4! FNCL!4.5! FNCL!5!

QE3(Announcement

QE4(Announcement

! 35!

Chart 9: QE3 & QE4 30-Year Conventional Mortgage to MBS Yield Spread !

!0.00!

0.10!

0.20!

0.30!

0.40!

0.50!

0.60!

0.70!

0.80!

0.90!

8/2/12! 9/2/12! 10/2/12! 11/2/12! 12/2/12!

30#Year(Conventional(Mortgage#MBS(

Spread(

QE3(Announcement

QE4(Announcement

! 36!

8.2 Appendix B: Tables Table 1: Federal Funds Rate Cuts Date Change Level (%) June 29, 2006 25 basis point increase! 5.25 September 18, 2007 50 basis point decrease 4.75 October 31, 2007 25 basis point decrease 4.50 December 11, 2007 25 basis point decrease 4.25 January 22, 2008 75 basis point decrease 3.50 January 30, 2008 50 basis point decrease 3.00 March 18, 2008 75 basis point decrease 2.25 April 30, 2008 25 basis point decrease 2.00 October 8, 2008 50 basis point decrease 1.50 October 29, 2008 50 basis point decrease 1.00 December 16, 2008 75-100 basis point decrease 0-0.25

! 37!

Table 2: Announcement Dates & Details of Quantitative Easing Programs Announcement Date Details QE1, November 25 2008 FOMC Statement: “The Federal Reserve announced on Tuesday that it

will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs), and [agency] mortgage-backed securities (MBS)…This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

QE1 Expansion, March 18, 2009

FOMC Statement: “To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year…Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

QE2, November 3 2010 FOMC Statement: “The Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

Operation Twist, September 21 2011

FOMC Statement: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

QE3, September 13 2012 FOMC Statement: “The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”

QE4, December 12 2012 FOMC Statement: “To support a stronger economic…the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. In particular, the Committee…currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent”

! 38!

Table 3: Key Events in the Relevant Periods

Date Event September 7, 2012 Labor Department reports that nonfarm payroll employment rose by

96,000 jobs, far lower than the 125,000 that economists expected. September 13, 2012 FOMC Statement: “To support a stronger economic…the Committee

agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”

November 23, 2012 The president of the San Francisco Fed, John Williams, states, “In terms of how far you can go, I don't think that we're anywhere near any kind of limit…Conceptually, you could imagine some upper limit to this but I don't think we're getting anywhere near it.” Also indicating that he supported the continued purchase of both mortgage-backed bonds and Treasury debt at the present pace into 2013.

December 7, 2012 Labor Department reports that nonfarm payroll employment rose by 146,000 jobs, far greater than the 79,000 that economists expected.

December 12, 2012 FOMC Statement: “To support a stronger economic…the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. In particular, the Committee…currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent”

!!!!!!!!!!!!

! 39!

Table 4: QE3 Treasury Yields

Date 3-mo. 1-yr. 2-yr. 5-yr. 10-yr. 30-yr.

Treasury Yields around Announcement Date (percent):

Sept. 6 (Thurs.) 0.1014 0.1675 0.2579 0.6777 1.6781 2.7987

Sept. 7 (Fri.) 0.1014 0.1624 0.2500 0.6442 1.6678 2.8245

Sept. 7 (Fri.) 0.1014 0.1624 0.2500 0.6442 1.6678 2.8245

Sept 10 (Mon.) 0.1014 0.1573 0.2460 0.6378 1.6541 2.8057

Sept. 12 (Wed.) 0.1017 0.1573 0.2420 0.6907 1.7576 2.9215

Sept. 13 (Thurs.) 0.0966 0.1522 0.2340 0.6426 1.7230 2.9311

Sept. 14 (Fri.) 0.0966 0.1624 0.2500 0.7134 1.8660 3.0884

Responses to announcements (basis points):

1-day change, Sept. 6-7 0.0 -0.5 -0.8 -3.4 -1.0 2.6

1-day change, Sept. 7-10 0.0 -0.5 -0.4 -0.6 -1.4 -1.9

2-day change, Sept. 12-14 -0.5 0.5 0.8 2.3 10.8 16.7

Unconditional Standard Deviation of Treasury Yield Changes (basis points):

1-day changes 0.9368 0.4853 0.9590 2.8989 4.7704 4.5447

2-day changes 1.1953 0.6805 1.3681 3.8924 6.4314 6.5492

Between 5/01/12 and 4/30/13

Significance Test (t-values)

1-day change, Sept. 6-7 0.000 -1.047 -0.825 -1.157 -0.215 0.568

1-day change, Sept. 7-10 0.000 -1.047 -0.415 -0.220 -0.288 -0.413

2-day change, Sept. 12-14 -0.426 0.746 0.583 0.583 1.685* 2.549***

!!!!!!!!!!!!!!!!!!

! 40!

Table 5: QE3 Agency Mortgage-Backed Security Yields !

Date% FNCL%3% FNCL%3.5% FNCL%4% FNCL%4.5% FNCL%5% GNSF%3% GNSF%3.5% GNSF%4% GNSF%4.5% GNSF%5%

Treasury%Yields%around%Announcement%Date%(percent):%

% % % % % % % %

Sept.%6%(Thurs.)% 2.3645% 2.0517% 1.8857% 1.6670% 1.0981% 2.2777% 1.7575% 1.6200% 1.2786% 1.3771%

Sept.%7%(Fri.)% 2.2714% 1.9771% 1.8600% 1.6670% 1.0865% 2.2049% 1.6808% 1.5987% 1.2599% 1.3866%

% % % % % % % % % % %

Sept.%7%(Fri.)% 2.2714% 1.9771% 1.8600% 1.6670% 1.0865% 2.2049% 1.6808% 1.5987% 1.2599% 1.3866%

Sept%10%(Mon.)% 2.2541% 1.9622% 1.8686% 1.7064% 1.1214% 2.1855% 1.6617% 1.5632% 1.2880% 1.4153%

% % % % % % % % % % %

Sept.%12%(Wed.)% 2.3470% 2.0517% 1.9372% 1.7557% 1.2382% 2.2339% 1.6999% 1.6058% 1.3444% 1.4727%

Sept.%13%(Thurs.)% 2.0991% 1.8070% 1.7662% 1.5984% 1.1098% 2.0038% 1.4784% 1.4431% 1.2131% 1.3580%

Sept.%14%(Fri.)% 2.2194% 1.9103% 1.8515% 1.6769% 1.1564% 2.0895% 1.5792% 1.5277% 1.3162% 1.4248%

% % % % % % % % % % %

Responses%to%announcements%(basis%points):%

% % % % % % % %

1Nday%change,%Sept.%6N7% N9.3% N7.5% N2.6% 0.0% N1.2% N7.3% N7.7% N2.1% N1.9% 1.0%

1Nday%change,%Sept.%7N10% N1.7% N1.5% 0.9% 3.9% 3.5% N1.9% N1.9% N3.6% 2.8% 2.9%

2Nday%change,%Sept.%12N14% N12.8% N14.1% N8.6% N7.9% N8.2% N14.4% N12.1% N7.8% N2.8% N4.8%

% % % % % % % % % % %

Unconditional%Standard%Deviation%of%Treasury%Yield%Changes%(basis%points):%

% % % % % %

1Nday%changes% 5.0541% 4.7642% 3.3855% 2.9611% 2.8732% 4.4577% 4.4169% 3.4577% 3.5213% 3.3504%

2Nday%changes% 6.7693% 6.5117% 4.7535% 4.1338% 4.0812% 6.1274% 6.0547% 4.8822% 5.2626% 4.8277%

Between&5/01/12&and&4/30/13&

% % % % % % % % % % % % % % % % % % % %

Significance%Test%(tNvalues)% %% %% %% %% %% %% %% %% %% %%

1Nday%change,%Sept.%6N7% N1.841*% N1.565% N0.759% 0.000% N0.405% N1.634% N1.737% N0.618% N0.533% 0.285%

1Nday%change,%Sept.%7N10% N0.343% N0.312% 0.253% 1.328% 1.215% N0.434% N0.433% N1.027% 0.799% 0.855%

2Nday%change,%Sept.%12N14% N1.884*% N2.170**% N1.804*% N1.907*% N2.005**% N2.358**% N1.993*% N1.599% N0.537% N0.992%

!

! 41!

! ! ! ! ! ! ! ! ! ! !

Table 6: QE4 Treasury Yields

Date 3-mo. 1-yr. 2-yr. 5-yr. 10-yr. 30-yr.

Treasury Yields around Announcement Date (percent):

Nov. 22 (Thurs.) 0.0913 0.1726 0.2702 0.6791 1.6796 2.8198

Nov. 23 (Fri.) 0.0862 0.1726 0.2703 0.6870 1.6899 2.8284

Nov. 23 (Fri.) 0.0862 0.1726 0.2703 0.6870 1.6899 2.8284

Nov. 26 (Mon.) 0.0913 0.1675 0.2663 0.6660 1.6625 2.8018

Dec. 6 (Thurs.) 0.0913 0.1675 0.2381 0.6011 1.5857 2.7739

Dec. 7 (Fri.) 0.0811 0.1675 0.2381 0.6186 1.6215 2.8104

Dec. 7 (Fri.) 0.0811 0.1675 0.2381 0.6186 1.6215 2.8104

Dec. 10 (Mon.) 0.0761 0.1624 0.2341 0.6170 1.6164 2.7979

Dec. 11 (Tues.) 0.0659 0.1472 0.2380 0.6346 1.6541 2.8410

Dec. 12 (Wed.) 0.0608 0.1523 0.2420 0.6522 1.6980 2.8894

Dec. 13 (Thurs.) 0.0507 0.1421 0.2500 0.6956 1.7299 2.9054

Responses to announcements (basis points):

1-day change, Nov. 22-23 -0.51 0.00 0.01 0.79 1.03 0.86

1-day change, Nov. 23-26 0.51 -0.51 -0.40 -2.10 -2.74 -2.66

1-day change, Dec. 6-7 -1.01 0.00 -0.01 1.75 3.58 3.66

1-day change, Dec. 7-10 -0.51 -0.51 -0.40 -0.16 -0.51 -1.25

2-day change, Dec. 11-13 -1.52 -0.51 1.19 6.10 7.58 6.44

Unconditional Standard Deviation of Treasury Yield Changes (basis points):

1-day changes 0.9368 0.4853 0.9590 2.8989 4.7704 4.5447

2-day changes 1.1953 0.6805 1.3681 3.8924 6.4314 6.5492

Between 5/01/12 and 4/30/13

Significance Test (t-values)

1-day change, Nov. 22-23 -0.541 0.000 0.009 0.274 0.216 0.190

1-day change, Nov. 23-26 0.541 -1.047 -0.422 -0.724 -0.574 -0.585

1-day change, Dec. 6-7 -1.083 0.000 -0.005 0.605 0.750 0.804

1-day change, Dec. 7-10 -0.541 -1.047 -0.416 -0.055 -0.108 -0.275

2-day change, Dec. 11-13 -1.273 -0.745 0.873 1.567 1.179 0.983

!

!!!!

! 42!

! Table 7: QE4 Agency Mortgage-Backed Security Yields !

!

Date! FNCL!3! FNCL!3.5! FNCL!4! FNCL!4.5! FNCL!5! GNSF!3! GNSF!3.5! GNSF!4! GNSF!4.5! GNSF!5!

!

!

Treasury!Yields!around!Announcement!Date!(percent):!

! ! ! ! ! ! ! ! !

!

Nov.!22!(Thurs.)! 2.0991! 1.8164! 1.8773! 1.8114! 1.4120! 2.0228! 1.5949! 1.6510! 1.5690! 1.8875!

!

!

Nov.!23!(Fri.)! 2.1105! 1.8242! 1.8773! 1.8114! 1.4001! 2.0323! 1.5949! 1.6436! 1.5690! 1.8875!

!

!

Nov.!23!(Fri.)! 2.1105! 1.8242! 1.8773! 1.8114! 1.4001! 2.0323! 1.5949! 1.6436! 1.5690! 1.8875!

!

!

Nov.!26!(Mon.)! 2.0536! 1.7623! 1.8420! 1.7714! 1.3883! 1.9755! 1.5422! 1.6068! 1.5308! 1.8678!

!

!

Dec.!6!(Thurs.)! 1.9913! 1.6931! 1.7805! 1.7116! 1.4238! 1.9331! 1.5225! 1.5627! 1.3788! 1.9467!

!

!

Dec.!7!(Fri.)! 2.0252! 1.7084! 1.7717! 1.7116! 1.3883! 1.9613! 1.5290! 1.5554! 1.3882! 1.9269!

!

!

Dec.!7!(Fri.)! 2.0252! 1.7084! 1.7717! 1.7116! 1.3883! 1.9613! 1.5290! 1.5554! 1.3882! 1.9269!

!

!

Dec.!10!(Mon.)! 2.0309! 1.7315! 1.7805! 1.7017! 1.4001! 1.9331! 1.5093! 1.5407! 1.3316! 1.8875!

!

!

Dec.!11!(Tues.)! 2.0479! 1.7392! 1.8068! 1.7315! 1.4001! 1.9472! 1.5093! 1.5554! 1.3127! 1.8875!

!

!

Dec.!12!(Wed.)! 2.0820! 1.7623! 1.8156! 1.7415! 1.4238! 1.9755! 1.5225! 1.5627! 1.3410! 1.9269!

!

!

Dec.!13!(Thurs.)! 2.1048! 1.7855! 1.8244! 1.7415! 1.4475! 1.9944! 1.5422! 1.5774! 1.3410! 1.9368!

!

!

Responses!to!announcements!(basis!points):!

! ! ! ! ! ! ! ! !

!

1Oday!change,!Nov.!22O23! 1.1! 0.8! 0.0! 0.0! O1.2! 0.9! 0.0! O0.7! 0.0! 0.0!

!

!

1Oday!change,!Nov.!23O26! O5.7! O6.2! O3.5! O4.0! O1.2! O5.7! O5.3! O3.7! O3.8! O2.0!

!

!

1Oday!change,!Dec.!6O7! 3.4! 1.5! O0.9! 0.0! O3.5! 2.8! 0.7! O0.7! 0.9! O2.0!

!

!

1Oday!change,!Dec.!7O10! 0.6! 2.3! 0.9! O1.0! 1.2! O2.8! O2.0! O1.5! O5.7! O3.9!

!

!

2Oday!change,!Dec.!11O13! 5.7! 4.6! 1.8! 1.0! 4.7! 4.7! 3.3! 2.2! 2.8! 4.9!

!

!

Unconditional!Standard!Deviation!of!Treasury!Yield!Changes!(basis!points):!

! ! ! ! ! ! !

!

1Oday!changes! 5.0541! 4.7642! 3.3855! 2.9611! 2.8732! 4.4577! 4.4169! 3.4577! 3.5213! 3.3504!

!

!

2Oday!changes! 6.7693! 6.5117! 4.7535! 4.1338! 4.0812! 6.1274! 6.0547! 4.8822! 5.2626! 4.8277!

!

!

Between&5/01/12&and&4/30/13&! ! ! ! ! ! ! ! ! !

!

Significance!Test!(tOvalues)! !! !! !! !! !! !! !! !! !! !!

!

!

1Oday!change,!Nov.!22O23! 0.226! 0.163! 0.000! 0.000! O0.412! 0.213! 0.000! O0.213! 0.000! 0.000!

!

!

1Oday!change,!Nov.!23O26! O1.126! O1.298! O1.042! O1.350! O0.411! O1.275! O1.194! O1.065! O1.086! O0.588!

!

!

1Oday!change,!Dec.!6O7! 0.671! 0.322! O0.259! 0.000! O1.235! 0.634! 0.149! O0.212! 0.269! O0.590!

!

!

1Oday!change,!Dec.!7O10! 0.112! 0.484! 0.259! O0.336! 0.411! O0.634! O0.446! O0.423! O1.609! O1.178!

!

!

2Oday!change,!Dec.!11O13! 0.840! 0.711! 0.370! 0.241! 1.160! 0.770! 0.542! 0.451! 0.537! 1.022!

!

! 43!

Table 8: QE3 30-Year Conventional Mortgage to MBS Yield Spread

!Date% %% %% Yield%Spread%% Treasury%Yields%around%Announcement%Date%(percent):%

%Sept.%6%(Thurs.)%% %

0.6913% Sept.%13%(Thurs.)%

% %0.6139%

Sept.%20%(Thurs.)%% %

0.5859%

% % % %

Responses%to%announcements%(bp):%% %1Eweek%change,%Sept.%6E13%

% %E7.7%

2Eweek%change,%Sept.%6E20%% %

E2.8%

% % % %

Unconditional%Standard%Deviation%of%Treasury%Yield%Changes%(bp):%1Eweek%changes%

% %10.2737%

2Eweek%changes%% %

20.7925% Between&5/03/12&and&4/25/13&

% %% % % %

Significance%Test%(tEvalues)% %% %% %% 1Eweek%change,%Sept.%6E13%

% %E0.754%

2Eweek%change,%Sept.%6E20% %% %% E0.273% !Table 9: QE4 30-Year Conventional Mortgage to MBS Yield Spread

! %Date% %% %% Yield%Spread%%

Treasury%Yields%around%Announcement%Date%(percent):%

% %Dec.%6%(Thurs.)%% %

0.6099%%

Dec.%13%(Thurs.)%

% %0.4696%

%

Dec.%20%(Thurs.)%% %

0.4493%%

% % % % %

Responses%to%announcements%(bp):%% % %1Eweek%change,%Dec.%6E13%

% %E14.0%

%

2Eweek%change,%Dec.%6E20%% %

E2.0%%

% % % % %

Unconditional%Standard%Deviation%of%Treasury%Yield%Changes%(bp):%%1Eday%changes%

% %10.2737%

%

2Eday%changes%% %

20.7925%%

Between&5/03/12&and&4/25/13&

% % %% % % % %

Significance%Test%(tEvalues)% %% %% %%

%

1Eweek%change,%Dec.%6E13%% %

E1.366%%

2Eweek%change,%Dec.%6E20% %% %% E0.198%

%

% % % % % !

! 44!

Table 10: Mortgage Bankers Association Indices

Date Event MBAVBASC Tracks the number of mortgage applications MBAVPRCH Tracks the number of mortgage purchase applications MBAVREFI Tracks the number of mortgage refinancing applications MBAVARM Tracks the number of adjustable-rate mortgage applications MBAVFRM Tracks the number of fixed-rate mortgage applications MBLSTOTL Tracks the total average loan size MBLSPURC Tracks the average purchase loan size MBLSREFI Tracks the average refinancing loan size MBLSARM Tracks the average adjustable-rate mortgage loan size MBLSFRM Tracks the average fixed-rate mortgage loan size

!!

! 45!

! !

Table 11: One-Week Activity Changes in MBA Indices

!!

Signal' MBAVBASC' MBAVPRCH' MBAVREFI' MBAVARM' MBAVFRM' MBLSTOTL' MBLSPURC' MBLSREFI' MBLSARM' MBLSFRM'!

!QE1!Announcement! 453.3! 99.5! 2548.8! 410.3! 475.8! 22.8! 5.0! 28.5! 85.7! 27.3!

!

!Formal!QE1!Launch! 404.0! 30.4! 2602.6! 21.5! 422.5! 7.6! 1.3! 6.8! 462.9! 9.7!

!

!QE1!Expansion! 282.5! 10.7! 1865.6! 429.4! 297.6! 6.6! 2.1! 6.4! 412.4! 8.9!

!

!QE2!announcement! 46.0! 9.8! 258.9! 35.9! 46.5! 2.5! 3.9! 2.3! 0.8! 2.9!

!

!

Operation!Twist!announcement! 65.2! 4.4! 426.4! 46.2! 68.8! 3.4! 2.4! 3.3! 41.2! 5.2!

!

!QE3!announcement! 41.5! 47.3! 35.8! 24.8! 42.8! 5.4! 40.4! 7.2! 17.8! 4.4!

!

!QE4!announcement! 4114.2! 410.0! 4723.8! 434.5! 4118.3! 41.1! 41.5! 41.3! 46.2! 41.8!

!

! ! ! ! ! ! ! ! ! ! ! ! !

Table 12: Statistical Significance of One-Week Activity Changes in MBA Indices

!!! t8statistics'

!!

Signal' MBAVBASC' MBAVPRCH' MBAVREFI' MBAVARM' MBAVFRM'!

!QE1!Announcement! 5.796***! 5.166***! 5.436***! 40.164! 5.891***!

!!

Formal!QE1!Launch! 5.140***! 1.609! 5.480***! 0.317! 5.206***!!

!QE1!Expansion! 3.537***! 0.598! 3.765***! 40.441! 3.610***!

!!

QE2!Announcement! 0.517! 0.658! 0.402! 0.432! 0.508!!

!Operation!Twist!Announcement! 0.705! 0.355! 0.610! 40.091! 0.723!

!!

QE3!Announcement! 40.024! 40.562! 0.035! 0.256! 40.036!!

!QE4!Announcement! 41.182! 40.817! 40.940! 40.376! 41.191!

!!

Signal' MBLSTOTL' MBLSPURC' MBLSREFI' MBLSARM' MBLSFRM'!

!QE1!Announcement! 4.286***! 1.458**! 4.146***! 3.462***! 4.996***!

!!

Formal!QE1!Launch! 1.436! 0.359! 1.000! 42.566***! 1.787*!!

!QE1!Expansion! 1.251! 0.595! 0.945! 40.512! 1.647*!

!!

QE2!Announcement! 0.489! 1.088! 0.357! 0.021! 0.562!!

!Operation!Twist!Announcement! 0.668! 0.651! 0.516! 40.054! 1.012!

!!

QE3!Announcement! 1.067! 40.134! 1.131! 0.632! 0.874!!

!QE4!Announcement! 40.206! 40.436! 40.191! 40.234! 40.339!

!