
In the world of mortgage-backed bonds, an "outside force" takes many forms, including:
*Economic events (i.e. jobs and housing data)
*Political events (i.e. N. Korea missle testing)
*Psychological events (i.e. Safe Haven buying)
But of all the outside forces that alter the mortgage rate trajectory, today's most powerful one is the Federal Reserve.
Earlier this year, the Fed pledged $1.25 trillion to the mortgage markets to help keep mortgage rates low.
It has $820 billion left to spend.
The gist of the Federal Reserve's Agency MBS Program is to create massive demand for mortgage-backed bonds over a short period of time, pushing bond prices higher and, therefore, bond yields lower. This is why mortgage rates plunged after the Fed first announced the program in December 2008.
Here we are, though, one-third of the way through the year and one-third of the Fed's budget is gone. Yet, mortgage rates are rising over 5 percent. This is exactly what the Fed doesn't want to happen. Therefore, it's entirely possible that the Fed calls an audible on the Agency MBS Program in the coming weeks, changing it in one of 2 ways:
1. Accelerate the pace of its purchases in the next 60 days
2. Increase its mortgage market commitment from $1.25 trillion to something higher
Either action would shake mortgage rates off their current trajectory, causing them to fall; and probably by a lot.
This brings us back to inertia.
Mortgage rates respond to outside forces and the Federal Reserve may just be the ultimate outside force. When Plan A didn't work for the Fed, they implemented Plan A-But-Bigger. Now, if Plan A-But-Bigger doesn't work, it's reasonable to expect Plan A-The-Biggest.
Remember, the Fed's original plan was to purchase $500 billion in agency debt. When that was deemed too little money to make a difference, however, the Fed threw another 1-and-a-half times as much cash at the problem.
Given how rates are rising, we can't rule out this subsequent expansion.
Increasing the size of the Agency MBS Program, or even just accelerating the rate at which bonds are purchased, would cause the rate hikes of the last two weeks to unwind overnight. It would also provide an ample buffer against rising oil prices and inflation-centric trading that tends to draw mortgage rates up.
If you're living in San Diego, California or elsewhere and fear you missed the Refi Boom of 2009 -- a final Fed intervention might be your last chance to cash in.
When the Federal Reserve talks about the Agency Mortgage-Backed Security Purchase Program, its stated goal is to "foster improved conditions", Fed-speak for "keep mortgage rates low". The higher rates go, therefore, the more likely the Fed will step in as that outside force.
Should the Fed intervene one last time, be ready to lock in when it happens. The economy is starting to recover, after all, and once the recovery's complete, the Fed won't need to run its buyback programs anymore.
If you've got a specific interest rate target in mind, email me your mortgage details and we'll put a "watch" on it. When your rate hits, you'll get it.
0 comments:
Post a Comment