This probably means interest rates won’t go down….
by Tom on August 11, 2009
in Market Musings, Market Report, Mortgage Rate Updates
Let me explain:
- As part of an effort to stimulate the economy, the Fed said that they were going to buy $300 Billion in Treasuries (and a substantial amount of Fannie and Freddie’s debt too.).
- The $300 Billion will be “used up” next month.
- It appears that they are going to stop buying Treasuries at that point.
Now a couple of “questions” that raises:
- When they said they’d buy the $300 Billion, they also committed to over $700 Billion in Mortgage Backed Securities from Fannie Mae and Freddie Mac. So this is only one part of the equation. How big of an issue will it be to the rates?
- When they announced that they were buying them, rates plummeted. Does that mean they are going to go up when they stop? Probably but it’s not guaranteed.
When you look at the law of supply and demand and combine it with the graph below that shows how much the Fed has spent, there’s one thing that becomes clear to me: It’s not possible to take a buyer out of the Treasury market who has been spending that kind of money without it having at least some impact on Treasury rates. And we all know that Treasuries and mortgage rates aren’t linked in “lock step” but they do tend to follow the same general path.
Does this guarantee that rates are going up? Nope, but it reduces the chances of them going down. The Fed’s meeting ends at 2:15 Wednesday. Look for more at that point on what the Fed says about Treasury purchases and what it means.
Stay tuned,
Tom Vanderwell
Calculated Risk: Fed Poised to Halt Treasury Purchases Soon
The Fed has been a steady buyer of Treasury securities. It appears this program will end in September.From the last FOMC statement:
[T]he Federal Reserve will buy up to $300 billion of Treasury securities by autumn.
From Bloomberg last week: Fed Set to End Purchases, Two Former Governors Say
The Federal Reserve is set to halt its purchases of up to $300 billion in U.S. Treasuries in mid- September as scheduled, and will probably announce the decision next week, two former central bank governors said.
