Mortgage Backed Securities For Fed¡¯S QE3?

Well, it looks like Bill Gross is going to have a shot at boosting the lagging returns of his huge Pimco Total Return Fund (PTTAX)? during the closing months of the year after having recently added a big stake in mortgage backed securities. It now appears the Federal Reserve will soon be a much bigger buyer of these assets, at least according to this WSJ report($) by the central bank's mouthpiece, Jon Hilsenrath (I don't know if there's any way you can be the main WSJ guy when it comes to the Fed without being called its "mouthpiece").

Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery��the housing and mortgage markets��by working to push down mortgage rates.

Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.

The Fed discussions occur amid broader efforts in the government to find ways to revive housing markets and stir refinancing.

"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University.

Combined with an upcoming government program to refinance mortgages that commercial banks won't �C due to the homeowner ! having t oo little equity or other reasons �C the Fed's effort to make mortgage rates even more freakishly low is believed to be the best bet at aiding the U.S. housing market.

We'll see if it helps housing. The bigger impact will likely come for other asset classes when investment banks start talking about the size of QE3. My guess would be $800 billion �C bigger than QE2, but not above the $1 trillion mark that would signal panic.

{$end}