Interest Rates Heading Higher as FED Ends MBS Purchases
We have all heard someone say “they’re printing money in Washington” or “the FED is printing money” what these people are referring to is a process called Quantitative Easing. That is much too broad a topic to discuss here, but here is the wikipedia entry: Quantitative Easing. Today marks the end of that process…Maybe.
The Federal Reserve previously announced that they would end their 1.25 trillion worth of Mortgage Backed Security purchases at the end of March. I discussed the goals and outlined this process in a post a couple of weeks ago: FED MBS Purchase Program.
The purpose was two-fold, added price stability and a ceiling on interest rates for mortgage loans. In anticipation of the end of this program, interest rates began to move higher last week. This was not a surprise. If the biggest buyer for any bond was leaving the market the bond’s price would naturally fall slightly pushing the rate higher. The rate move does however, lead us to a couple major questions:
- 1. If rates climb high enough (6%-6.5%) will the FED step back in with more easing?
These comments from the March 16th Federal Open Market Committee (FOMC) commentary seem to indicate they would if deemed necessary:
“the committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.” Full FOMC Commentary March 16th, 2010
Since a home is the largest investment most americans make, I read “price stability” as “Home price stability”.
Overall, the FED has handled the financial crisis better than most central banks around the world. Along that line, they are not moving from purchases directly to sales which would send rates higher in a hurry. That leads us to the next question.
- 2. Will private buyers step in to replace what the FED was doing?
It was estimated that 100 billion a month in MBS purchases would be needed to fill the void left by the FED program. There will be demand for MBS as PIMCO, the world’s largest bond fund, and many others have been underweight the securities.
“They did make MBS become expensive (they probably didn’t need to buy the last $400 billion), but money managers and others are now underweighted and will repurchase if MBS underperform,” – Scott Simon, head of mortgage-backed securities at PIMCO. Full Business Week Article
Still the void left is large and the following weeks will be telling.
Current 30 year fixed: 5.125% Direction: slowly higher
Check back in April for a Rate Update.
Best,
JLC
