The Fed’s TALF program has created substantial demand for MBSs since the program was announced last November.  The additional demand has pushed MBS prices higher which pushes yields lower.

Here are a couple excerpts from the WSJ.com article:

*The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities.

*Mainly because of heavy government intervention in the mortgage market, interest rates remain near their lowest levels in decades. Rates on 30-year fixed-rate conforming mortgages currently average 5.24%, down from a recent peak of 5.81% in June but up from the year’s low of 4.84% in late April, according to HSH Associates, in Pompton Plains, N.J.

*The Fed is about two-thirds of the way through its mortgage-purchase program, which was launched late last year to support mortgage lending, housing activity and broader credit markets. The central bank’s decision to complete the full $1.25 trillion in purchases of mortgage-backed securities — rather than “up to” that amount, as it said in August — ended speculation that it might stop short, as a handful of policymakers have suggested. The Fed still plans to buy up to $200 billion in debt issued by Fannie Mae and Freddie Mac.

*Mortgage rates were expected to rise throughout the fall and winter as the Fed wound down its program to buy the mortgage-related securities. Even if they inch up, now they’re less likely to increase as sharply, given the Fed’s longer time horizon that stretches to March.

As we warned in yesterday’s ‘rate update’ there is plenty of economic data out this week.

This morning the National Association of Realtors announced that pending home sales rose for the 6th straight month in June.  Pending home sales rose 3.2% in June which was more than analysts had expected.  This is good news for the housing market and the economy as a whole.

In a separate report the Institute for Supply Management reported that manufacturing activity in the US grew at a faster clip than analysts had expected.

It wasn’t all good news though.  The Commerce Department reported that construction spending unexpectedly declined in July.

Despite 2 out of the 3 economic reports coming out better than expected stocks are trading lower this morning which is helping support mortgage-backed bond prices.

Current outlook: floating bias