The Trump administration has launched a comprehensive mortgage-backed securities purchase program designed to stabilize housing market conditions as borrowing costs remain elevated compared to pandemic-era levels. Treasury Secretary Scott Bessent outlined the initiative's scope and objectives, emphasizing its role in countering ongoing Federal Reserve balance sheet reductions.

Federal Reserve Balance Sheet Dynamics

The Federal Reserve has been systematically reducing its mortgage-backed securities holdings as part of its broader balance sheet normalization process. The central bank currently maintains just over $2 trillion in MBS holdings, representing legacy positions from financial crisis and pandemic-era stimulus programs.

According to Bessent, the administration's strategy involves matching the scale of the Fed's monthly MBS reduction, which averages approximately $15 billion per month. This approach aims to provide market stability by offsetting the natural decline in Fed holdings without directly intervening in monetary policy operations.

Government-Sponsored Enterprise Implementation

President Donald Trump directed the Federal Housing Finance Agency to execute the bond purchase program through Fannie Mae and Freddie Mac, with authorization for up to $200 billion in total acquisitions. FHFA Director William Pulte confirmed the program's operational launch with an initial purchase round.

The purchases are being funded through the balance sheets of Fannie Mae and Freddie Mac rather than direct government expenditure. Bessent noted that both government-sponsored enterprises maintain ample cash reserves to support the program without compromising their financial stability.

Current Mortgage Market Conditions

Mortgage rates have declined from recent peaks but remain significantly above pandemic-era levels, contributing to persistent housing affordability challenges. The average 30-year fixed-rate loan currently stands at approximately 6.2%, representing a substantial decrease from nearly 8% levels reached in 2024.

Analysts suggest that the Fed's ongoing MBS runoff has constrained mortgage rate improvements over the past year. The combination of elevated borrowing costs and increased home prices has intensified affordability pressures across the housing market.

Market Impact and Mechanism

Bessent indicated that the purchase program is unlikely to directly reduce mortgage rates but could provide indirect benefits through yield spread compression. The initiative may narrow the differential between government-sponsored enterprise securities and U.S. Treasury bonds, potentially improving market liquidity conditions.

Fannie Mae and Freddie Mac function as critical housing market intermediaries by purchasing mortgages from lenders, securitizing these loans, and distributing the resulting bonds to investors. By acquiring their own securities, these entities can enhance lender balance sheet capacity for new loan origination.

The administration has simultaneously reiterated its commitment to reprivatizing Fannie Mae and Freddie Mac, which have operated under government conservatorship since the 2008 financial crisis. Bessent emphasized that the bond purchase program could support the enterprises' earnings profile while maintaining their robust financial position.

U.S. Treasury yields moved higher on Wednesday after jobless claims data, the last major economic release before the New Year, came in below economists' forecasts. The better-than-expected employment data pushed yields up as markets assessed the implications for Federal Reserve policy.

Treasury Yield Movements

The benchmark 10-year Treasury yield increased 1.90 basis points from Tuesday's close, reaching 4.147%. Meanwhile, the 2-year Treasury yield, which typically reflects interest rate expectations, rose 1.70 basis points to 3.471%.

Despite Wednesday's increase, both yields remain well below their 2025 peaks reached on January 13, when the 10-year yield hit 4.803% and the 2-year yield reached 4.402%.

Employment Data Drives Market Action

Initial jobless claims for the week ended December 27 totaled 199,000, coming in below the 220,000 forecast in a Reuters poll of economists. This stronger-than-expected labor market data contributed to the upward movement in yields as investors reassessed expectations for Federal Reserve policy.

The closely watched yield curve spread between 2-year and 10-year Treasury notes stood at 67.40 basis points, remaining 6.60 basis points below the year-high of 74.00 basis points.

Federal Reserve Policy Outlook

Market odds of an interest rate cut at the Federal Reserve's January meeting were last at 14.90%. The U.S. dollar five-year forward inflation-linked swap, considered by some as a better gauge of inflation expectations, was trading at 2.444%.

Yields have generally declined throughout 2025 as the Federal Reserve has gradually reduced its key interest rate, marking a shift from its hawkish stance maintained between 2020 and 2024. This represents the first year since 2020 that the 10-year yield has posted a yearly decline.

Record Repo Facility Usage

Eligible financial firms borrowed a record $74.60 billion from the Federal Reserve Bank of New York's Standing Repo Facility on Wednesday, representing a final borrowing push before the New Year.

Market participants continue to monitor key economic indicators that could influence Federal Reserve policy decisions, with the next major inflation and jobs reports expected in the first month of 2026.