So how high are rates going to go when the Fed stops buying mortgages?
by Tom on October 26, 2009
in Market Musings
So, how high are interest rates going to go when the Fed stops buying mortgages?
A couple of thoughts along that line:
- When the Fed announced that they were going to start buying mortgage backed securities, rates dropped .375% overnight. So it would be logical to assume that rates would go up by that amount when they are “all done.”
- If you read the article from Housing Wire (just part of it is below), it says that there are a couple of scenarios that could play out: 1) That we’ll end up around .20% above where we’re at now or 2) That we’ll end up around .25% higher but will overshoot (meaning go up by around .75%) and then settle down.
The third theory is that we don’t know what’s going to happen because the Fed’s “pull back” is going to cause other buyers to step out of the market until it stabilizes and the end result of the Fed’s finishing up their purchases is going to probably going to mean substantially higher rates.
Will the Fed’s movement cause us to hit 6% by April? I don’t think so. But it certainly appears that we’re going to be looking at least an additional .25 to .5% higher rates than we have now.
Tom Vanderwell
Not all analysts writing about the Fed’s departure will quantify the widening, but a couple have screwed up their courage to put a number on it. One house expects OAS to widen about 20 basis points from current levels, while the other expects OAS to overshoot by about 30-40 basis points before stabilizing around 25 basis points above current levels. All else equal (a brave assumption), mortgage rates would adjust upward in a comparable manner (saying more would be to start down a slippery slope).Projecting a widening of 40 basis points (or less) may be a tad optimistic, especially at the outset, when the Fed shuts down. Buyers will step back until the inevitable widening appears to be over or close to it – a process that can feed on itself as investors recalibrate perceptions and rules or thumb re: what’s cheap enough. After all, these are unprecedented circumstances the market faces, and history is likely to be a faulty guide. Consider too that many market-value-sensitive investors will be trimming positions (lowering their mortgage weightings in favor of appealing corporate spreads, for instance) as the end of 1st quarter 2010 approaches in order to avoid the price impact of the inevitable widening.
Technorati Tags: Mortgage rates, The Fed
