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 [...]

European Elections

2018-01-02T18:45:57+00:00 February 24th, 2017|Categories: In The News|Tags: , , , , , , |

One source of volatility for MBS prices is uncertainty about the outcome of upcoming elections in several European countries. Investors are most focused on the presidential election in France which will take place on April 23. Polls show a close race between Marine Le Pen and Emmanuel Macron. Le Pen's campaign has been centered on plans for France to leave the European Union (EU) and to stop using the euro currency, while the centrist Macron has run on a more traditional platform. It is not clear what would happen to the EU if France decided to exit. As a result, investors have reacted by shifting to safer assets after news which favors a Le Pen victory and doing the opposite after positive news for Macron. Since U.S. MBS are viewed as relatively safer assets, they have been affected by the shifts in sentiment, causing volatility.

Yellen Testimony

2018-01-02T18:43:30+00:00 February 14th, 2017|Categories: In The News, Special Update|Tags: , , , , , |

In her semi-annual testimony to Congress, Fed Chair Yellen said that the Fed expects that economic progress will call for "further gradual increases" in the federal funds rate. She also said that it would be "unwise" to wait too long to hike rates. Yellen later added that the Fed will consider in coming months when to begin to reduce the Fed's holdings of MBS. Of note, she said that the Fed will not sell MBS to shrink the holdings, but rather will stop replacing principal reductions. The expected pace of tightening by the Fed increased a little after her testimony, causing MBS to decline.

Fed Meeting

2018-01-02T18:44:35+00:00 December 14th, 2016|Categories: Special Update|Tags: , , , , , |

As widely expected, the Fed raised the federal funds rate by 25 basis points. Unfortunately for MBS, Fed officials also raised their outlook for the pace of future rate hikes. They now forecast three rate hikes in 2017, one more than previously projected. The faster pace was viewed as negative for mortgage rates. But why? The purpose for raising the federal funds rate is to keep inflation from rising above the Fed's target of 2%. This should be a good thing for mortgage rates. Part of the reason for the adverse reaction stems from a more direct effect the Fed has on mortgage rates. The Fed owns over $1.7 trillion of the agency mortgage-backed securities (MBS) that it purchased during its quantitative easing (QE) days. The Fed keeps the balance of MBS around that level by buying new MBS to replace that which pays off. The Fed is currently the buyer of approximately 25% of all newly issued MBS. This added demand from the Fed drives MBS prices higher and mortgage rates lower. The Fed says that it will not allow its holdings of MBS to decline until "normalization of the level of the federal funds rate is well under [...]

Special Update: Fed Meeting

2017-12-20T17:34:11+00:00 September 14th, 2015|Categories: Special Update|Tags: , , , , , , , , , , |

Fed day is coming up on Thursday. The Statement will be released at 2:00 ET, and Fed Chair Yellen’s press conference will follow at around 2:30 ET. Fed members appear divided about raising the federal funds rate at this meeting. Investor expectations are mixed as well. With no apparent consensus, whatever the Fed decides will likely cause a significant reaction in the markets. More important than the decision about hiking rates may be what investors learn about the Fed’s view of the economy and how that may influence future Fed policy.  What impact will this Fed meeting have on mortgage rates? The answer is not at all clear. It will depend on how the Fed’s decision and comments alter investors’ outlook for future Fed policy.  

Special Update: ECB

2017-12-20T17:34:11+00:00 January 21st, 2015|Categories: Special Update|Tags: , , , , , |

The Wall Street Journal reported that during tomorrow's European Central Bank (ECB) meeting the executive board of the ECB will recommend to the entire 25-member governing council a plan to begin a sovereign bond purchase program. The plan, which would be similar to the quantitative easing (QE) program used by the US Fed in recent years, would call for purchases of 50 billion euros (about $58 billion) per month for a minimum of one year. These figures are roughly in line with investor expectations, and the reaction in MBS markets has been small so far. If the governing council adopts this plan tomorrow, the impact on MBS may be small.  

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