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 over what period of time. There seems to be a wide range of answers to this question. Even within the Fed, there are differing opinions. One Fed member does not think any additional quantitative easing is needed. Another thinks they need to shock and awe the market. A plan promoted by several Fed members would have the Fed announce small amounts of purchases, like $100 billion at a time, with a plan to reconsider and recalibrate at each next Fed meeting. Investors have stated they expect anywhere from $500 billion to $1 trillion in Fed purchases. Each new piece of economic news can cause investors to reconsider their expectations and therefore the price they are willing to pay for MBS. Whatever the answer, some investors are going to be surprised. The answer is expected to come at the conclusion of the Fed’s next meeting on November 3rd at 2:15 ET.
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