Special Update: Fed Ends Bond Purchases

2017-12-20T17:34:12+00:00 October 30th, 2014|Categories: Special Update|Tags: , , , , , , |

The Fed will end its Treasury and MBS purchases next month, but the impact on mortgage rates likely will be small. Over the last few years, these bond purchases, known as quantitative easing, helped push mortgage rates down to the lowest levels in decades. Mortgage rates then moved off their historic lows in May of last year when the Fed unexpectedly announced that it would soon taper the bond purchases. Since then, the decreases in monthly purchases have been anticipated far in advance by investors, causing little market reaction.   As a result of quantitative easing, the Fed was the eventual investor in the majority of all mortgages originated during the bond purchase program. The Treasury and MBS purchases have caused the Fed’s balance sheet to expand to roughly $4.4 trillion dollars from less than $1.0 trillion in 2007. While the Fed will no longer purchase additional bonds, it will hold the size of its portfolio steady by reinvesting maturing securities. Eventually, though, Fed officials intend to reduce their holdings of MBS. Investors will be looking for hints about the timing for the Fed to begin to shrink its portfolio and for the pace at which it will occur. The [...]

Understanding the Fed Announcement

2017-12-20T17:34:14+00:00 September 23rd, 2011|Categories: In The News|Tags: , , , , , , |

Since the Fed released its statement yesterday afternoon, MBS markets have staged a very strong rally for several reasons. First, quite simply, the Fed confirmed that there are "significant downside risks" to the US economic outlook. Slower economic growth reduces inflationary pressures, which is favorable for MBS markets. Second, the Fed announced the widely expected Operation Twist program. This program will extend the average maturity of the Fed's portfolio by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasuries. The increased demand for longer-term assets is intended to help push longer-term rates lower. The third major element from the statement helping MBS markets was a surprise to most investors. The Fed will begin to reinvest MBS principal payments (from prepayments and maturing securities) in additional agency MBS. Until now, the Fed has been reinvesting the MBS principal payments in Treasury securities. With roughly $885 billion in MBS holdings in the Fed's portfolio, these principal payments are expected to create a significant source of additional demand for MBS, and this measure is specifically targeted at keeping mortgage rates at low levels. As usual, the impact of the economic news was priced in very quickly, similar [...]