Soleil's Carol Berger wondered aloud last week what will happen when the Fed stops buying mortgage backed securities in 2010? She fears that without that deep pocketed bidder there will be no other natural buyer and mortgage rates could go up enough to hurt the housing market. Seeing as how we are partners I figured part of my job would be to help find that reassurance she is looking for. I noticed a few pieces in the paper oddly enough that addressed the same subject.
Michael Mackenzie writing in Saturday's Financial Timessaid "There is the prospect for increased competition for .... debt sales once the Fed completes its mortgage purchases at the end of the month. Throw in the prospect of companies and banks having hefty amounts of debt maturing in the coming years and it's safe to think the clearing price will result in higher interest rates".
Not to be outdone over the weekend, in an article in Saturday's Wall Street Journal, Peter Eavis headlined his story "Ben Bernanke May Be Boxed In". He says "mortgage backed securities issued by Fannie Mae and Freddie Mac, the focus of the Fed's asset purchases, now have yields that are only slightly higher than Treasury yields. With only four months to go before the Fed is scheduled to end its purchases, it seems few investors....fear the Central Banks exit. But a real risk remains....securities purchases are scheduled to end well before any sizable drop in unemployment. And because those purchases have added to the monetary bang of low rates, stopping them could mean an effective tightening sooner than expected".
"Few investors...fear the Central Banks exit." That could mean that some investors are right and rates won't go up. Borrowing from work done by Soleil's Chief Economic Advisor, Lyle Gramley, (He who knows an awful lot), gives food for thought. Not addressing this topic but working for another reason, Lyle shared that spreads between conforming mortgages and the ten year Treasury bond peaked in December 2008 at 290 basis points. In December, the Fed said they were going to buy mortgage-backeds (and other paper) and the spread went to 250 basis points in January of 2009, 230 in February, and 220 in March. In March the Fed again came down from the mountain and said they would buy a total of $1.25 trillion giving size and oomph to the program (there are about $4 trillion total of mortgage related securities lying about). Spreads went to 150 basis points which is roughly where they are now. The market knows the Fed is exiting and spreads are where they are and the 30 year mortgage is below 5% as well. Time will tell, as it always does, but it does appear a clash of views is developing.