MBSQuoteline Weekly Newsletter | Rising Inflation
https://www.mbsquoteline.com/newsletter/view/385/19261/0/3
Special Update: Fed Rate Hike
After holding the federal funds rate near zero for seven years, the Fed announced a rate hike of 25 basis points, as widely expected. This was the first rate hike since June 2006. Investors are now asking what the pace of future rate hikes will be. According to the Fed statement, Fed officials expect that economic conditions will warrant only "gradual" increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon. Investors were pleased that the Fed does not appear to be in any rush to tighten monetary policy, and MBS prices and stocks moved a little higher. Want to see live MBS prices on the go? Check out the new look of www.mbsquoteline.com from your mobile device. All features optimized for your device. | Questions call 800-627-1077
Special Update: PPE Inflation
At the beginning of the year, a change was made to allow the Producer Price Index (PPI) to capture a wider range of items. PPI now focuses on the increase in prices of intermediate goods AND services used by companies to produce finished products. Services were not included before this year. One result of the change was to make the data more volatile month to month. Investors likely will look at longer-term trends in PPI, but they may not react much to monthly changes, as was seen today. To determine trends in inflation, investors rely more heavily on the Consumer Price Index (CPI), which measures price changes for finished goods, and the Core PCE price index, which is favored by the Fed.
Special Update: Fed to Reduce Bond Purchases
Anyone watching mortgage rates couldn’t miss the news this week that the Fed will begin to “taper, or cut back on their purchases of MBS and Treasury bonds. All eyes are on the impact this will have on interest rates. Their plan to purchase $10bb less per month signals the Fed’s growing confidence in the economy. Important to note though is that this means they will still purchase $75bb per month in MBS and treasuries for the time being, which still amounts to considerable economic stimulus. Much less publicized, but more immediately significant for interest rates, were two other announcements. The FHFA announced a .1% increase in the guaranty fee for mortgages delivered to Fannie Mae and Freddie Mac, effective in the spring, which amounts to an automatic .1% increase in interest rates. Also, Fannie Mae announced new Loan Level Pricing Adjustments (LLPAs) for loans delivered to them, also beginning in the spring. LLPAs are based on loan characteristics such as credit score, LTV, loan purpose, occupancy, number of units, product type, etc. These adjustments will also increase the cost of borrowing for homeowners. The net effect is that interest rates will likely rise a bit in the near term, [...]
Blog Talk Radio Show Summary November 15, 2010: What has Gone Wrong?
Mortgage rates have moved higher (mortgage security prices have moved lower) and strangely enough QE2 deserves much of the blame. The Fed intended for the opposite to happen. As they purchase their $600 billion in long-term Treasury securities, the Fed expected the added demand would drive prices higher and rates lower, not only for Treasury securities, but for mortgage backed securities as well. Things have not happened as planned. The Fed began their Treasury purchases on Friday and MBS prices fell 27/32nds. The Fed continued their Treasury purchases today and MBS prices are down another 16/32nds. So what has gone wrong? Some of the issue is that MBS prices rose considerably in the weeks preceding the Fed’s announcement that they were going to buy $600 billion of Treasury securities. The much anticipated announcement had already accomplished much of the expected end result before it even started. After the announcement, sentiment toward the benefits from the plan shifted. Investors worldwide began to doubt the Fed’s ability to control rising inflation when it begins. Foreign investors recalculated their required returns after seeing the value of the dollar fall to recent lows. Political power in the US shifted from the Democrats to the [...]
Blog Talk Radio Show Summary October 25, 2010: How Much Quantitative Easing (QE II)
Have you noticed an extra bit of volatility in MBS prices lately? Do you know the cause? Last week we saw mid-day price changes four out of the five days. Three were favorable, fortunately, and one was unfavorable. We saw unfavorable price changes Monday afternoon, this week. There are always several factors weighing in on investors as they decide what they will pay for mortgage-backed securities. The primary factor right now seems to be the Fed’s plan for more quantitative easing (QE II). QE II will have the Fed buying Treasury securities, adding liquidity to the market to stimulate lending, to promote economic growth, to reduce the value of the dollar, to make exported goods cheaper to foreign buyers and to make imported goods cost more, to create higher inflation. New demand for Treasury securities should improve demand for MBS as well, driving up prices. Too much QE II could add too much liquidity and reduce the value of the dollar too far, increasing inflation too much and driving up the yield required on MBS, reducing prices. No longer is there a question of whether the Fed will buy more Treasury securities, but the question is how much and [...]
Blog Talk Radio Show Summary August 16, 2010: Online Mortgage Industry Resource
Lykken-on-Lending (LoL) has partnered with HousingMatrix, an online resource of information for the housing industry. HousingMatrix now hosts the LoL library of the most recent recorded program as well as all prior programs. HousingMatrix is a site you should explore if you have not been there before. If the information you seek has to do with housing, you will find it at HousingMatrix. Mortgage rates have continued their move lower this week, reaching a new low this morning. Last Tuesday’s Fed announcement helped push mortgage rates lower and then the announcement on Friday that July’s inflation remains very low helped as well. The Fed announced that they were keeping the Fed Funds rate between .25% and 0% and that they expect to keep it at this very low level for an extended period of time. This was as expected. What was a bit of a surprise was that they expressed a concern that the pace of the economic recovery was slowing and they announced a new policy to add a little stimulus to the economy. The new policy deals with what they will do with the cash the Fed receives from payments on their portfolio of Treasury and mortgage-backed securities. [...]
More Fed MBS Purchases?
A couple of months ago, Fed Chief Bernanke was answering questions about the Fed's plan to sell its MBS portfolio. He stated that the Fed would eventually return its balance sheet to normal by selling the $1.25 trillion in MBS it had bought to stimulate the economy, but that it would not take place soon. While some Fed officials were pushing for a faster start date, investors believed that the MBS sales were likely to begin early in 2011. As the economic outlook has grown weaker, however, the Fed's likely plans have changed. Rather than discussing a start date for Fed tightening moves, Fed officials are now outlining options and conditions for adding further monetary stimulus. In particular, the Fed had been planning to allow the MBS in its portfolio to mature without replacing them. Due to defaults, refinancings, and maturities, some MBS "roll off" the Fed's portfolio over time. Until recently, investors expected the Fed to let its portfolio slowly shrink in this fashion, which would represent a minor amount of monetary tightening. Tuesday, though, a Wall Street Journal article suggested that Fed officials are considering whether to replace those securities to stimulate the economy. With the next Fed [...]
BlogTalkRadio Podcast – June 14, 2010
This week on BlogTalkRadio/Lykken-on-Lending: What drives mortgage rates? Inflation and uncertainty. Inflation is not present right now and according to the majority of the Federal Open Market Committee members it is not expected to be much of a concern for the near future. Uncertainty, though, is alive and well. Continuation of the recent economic improvement in the US is considered anything but certain. Global economic growth has been a question mark. The ability of several European nations to satisfy their debt obligations is uncertain. This uncertainty has resulted in tremendous volatility in the stock market, which has caused tremendous volatility in mortgage-backed securities prices. Daily, global headlines suggest to investors its time to shift assets to more or less risky investments. That is what happened last week. After reaching the highest level of the year, mortgage-backed security prices were beat down on Thursday based on headlines from Australia, China, and Europe, all which suggested improving economic conditions. Investors sold low risk bonds and bought higher risk stocks. The Dow gained 270 points. MBS prices lost 25/32nds. This pattern has been in place now since April when the European debt crisis raised its ugly head. Look for volatility in mortgage-backed security [...]
BlogTalkRadio Podcast – May 24, 2010
Mortgage rates made a nice move lower last week. In fact, they have moved lower each of the last four weeks, to the lowest level of the year. Many of us thought mortgage rates would head higher after the Fed stopped buying mortgage-backed securities (MBS) at the end of March. Mortgage rates did move higher just prior to and just after March 31st, but new circumstances entered the market in April. Uncertainty has pushed investors out of riskier assets like stocks (the Dow is well off its recent highs) and into less risky assets like government insured MBS. Several things are contributing to this uncertainty. The European debt crisis and a tightening monetary policy in China have made investors very uncertain about future economic growth in the US. In addition, the passage by the Senate of a financial reform bill has many investors questioning how freely banks will make capital available to US businesses to finance their expansion. This uncertainty combined with very low inflation rates have made MBS an attractive alternative. Dave Lykken hosted today’s show from the exhibit floor of the MBAs National Secondary Market and Expo. He reported that the conference was well attended and the [...]