During the quantitative easing years of 2008 through 2014, the Fed acquired trillions of dollars of Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities (Agency MBS) and U.S. Treasuries. Its balance sheet grew from under $1 trillion to over $4 trillion. The Fed stopped adding to its holdings a few years ago, but has maintained a policy to reinvest principle payments received, thus maintaining a steady level of investments. At times over the last few years when refinance activity was high and the Fed was reinvesting the principle payments it received, the Fed was the buyer of the vast majority of all newly issued Agency MBS. Even recently, the Fed has been the buyer of approximately 25% of newly issued Agency MBS. The demand from the Fed for Agency MBS has had a positive effect on mortgage rates. For the past few months, Fed speakers have been saying that the time to begin “normalizing their holdings was near. But few details were provided. The minutes of the Fed’s May 3nd meeting, released on May 24th, provided some details about their plan. Although many details remain unknown. The plan calls for the Fed to tell investors the maximum amount it [...]
One reason that mortgage rates are so low is the expectation that the ECB will begin to buy sovereign bonds, similar to the recently completed US quantitative easing (QE) program. Economic growth in Europe has stalled, and QE is one of the most powerful tools available to the ECB to help boost growth. The expected added demand for bonds from the ECB has caused bond yields around the world to decline. However, ECB officials are divided about QE, and the decision keeps getting pushed farther into the future. Notably, the Germans are opposed. At Thursday's press conference, ECB President Draghi appeared to take another small step in favor of QE. Draghi said that the ECB intends to increase the size of its balance sheet and that it would do so even without unanimous consent. However, he also deflated hopes for quick action by saying that the ECB would not consider QE until the end of the first quarter of 2015. The net impact of his comments was a small improvement in mortgage rates.
The Fed will end its Treasury and MBS purchases next month, but the impact on mortgage rates likely will be small. Over the last few years, these bond purchases, known as quantitative easing, helped push mortgage rates down to the lowest levels in decades. Mortgage rates then moved off their historic lows in May of last year when the Fed unexpectedly announced that it would soon taper the bond purchases. Since then, the decreases in monthly purchases have been anticipated far in advance by investors, causing little market reaction. As a result of quantitative easing, the Fed was the eventual investor in the majority of all mortgages originated during the bond purchase program. The Treasury and MBS purchases have caused the Fed’s balance sheet to expand to roughly $4.4 trillion dollars from less than $1.0 trillion in 2007. While the Fed will no longer purchase additional bonds, it will hold the size of its portfolio steady by reinvesting maturing securities. Eventually, though, Fed officials intend to reduce their holdings of MBS. Investors will be looking for hints about the timing for the Fed to begin to shrink its portfolio and for the pace at which it will occur. The [...]