Coronavirus and Rates

2020-03-12T15:31:07+00:00 March 12th, 2020|Categories: Uncategorized|Tags: , , , , , , |

Special Report: Coronavirus and Rates | March 5, 2020 As the number of reported cases of the coronavirus around the world has increased, the list of school closings, work interruptions, event cancellations, and other consequences has grown. This decline in economic activity has been brutal for stocks but good for bonds, pushing rates to record low levels. One commonly heard question, though, is why mortgage rates have not fallen as much as government Treasury yields. There are two main reasons. First, mortgage-backed securities (MBS) have prepayment risk while Treasuries do not. When people refinance, their loans are removed from MBS. This makes MBS less valuable to investors relative to Treasuries during periods of declines and more valuable during periods of increases. In other words, mortgage rates rise and fall more slowly than Treasury yields due to the basic properties of prepayment risk. Second, the large mortgage companies which purchase loans and set mortgage rates have the capacity to process only so much business at one time. Currently, there is more demand for loans and refinancings than these firms can handle, so they have less incentive to pass along the lowest possible rates to customers. Here are some actual figures from [...]

MBSQuoteline Special Update | State of the Markets

2019-08-15T22:15:53+00:00 August 15th, 2019|Categories: Special Update|Tags: , , , , |

This is an interesting time in financial markets, and we want to help you understand the many elements currently in play. Investors face a lot of significant questions on a wide range of issues right now, and it's no surprise that they have responded to the increased uncertainty by reducing the level of risk in their portfolios. As usual, their primary method to accomplish this has been to shift assets from stocks to bonds, including MBS. The trade tensions between the U.S. and China remain one of the largest sources of concern for investors. Tariffs and other barriers to trade slow global economic activity, which reduces the outlook for future inflation and is favorable for mortgage rates. The outlook for global economic growth is another big question mark for investors. Around the world, the manufacturing sector clearly has taken a hit from the trade issues, and business investment has fallen as companies hesitate to make long-term capital commitments. On the other hand, U.S. consumer spending has remained quite healthy in recent months, and Alibaba ("the Amazon of China") just released strong earnings results. In addition, several geopolitical events around the world are concerning. Massive protests have been taking place in [...]

Details on Fed Balance Sheet Reduction

2018-01-02T18:42:08+00:00 June 15th, 2017|Categories: Uncategorized|Tags: , , , , , |

After its meeting concluded on June 14th, the Fed provided some details about the plan to reduce its holdings of U.S. Treasuries and agency debt and mortgage-backed securities (MBS). Regarding the starting time for the reductions, Fed Chair Yellen said that they could begin “relatively soon if the economy performs in line with the Fed’s forecasts. This comment caused investors to anticipate that the starting time will be in September or October, which was sooner than expected. In a document called the Policy Normalization Principle and Plans, the Fed laid out additional information. They will reduce their holdings by not reinvesting all the principle payments received. Over the last few years, they have held the level of their holdings steady by reinvesting all the principle payments received. The amount of principle payment received that will not be reinvested will start at $10 billion per month and will grow by $10 billion every three months until the monthly total reaches $50 billion. The reduction then will be capped at $50 billion and will continue until the size of the Fed’s holdings has fallen to the desired level. The Fed did not disclose the desired level but did say they expect the [...]

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