What is likely to happen to mortgage rates tomorrow after the Fed statement is released? The best answer is that it will be extremely volatile. The majority view is that the Fed will begin to taper its bond purchase program, but the reaction in the mortgage market will depend on the details. The first question is the size of the reduction. Investors expect the Fed to cut its monthly purchases from $85 billion to around $70 billion. It is also uncertain how the reduction will be split between MBS and Treasuries. We would not be surprised if the Fed cut only Treasury purchases and left MBS purchases unchanged, since several Fed officials have stated that MBS purchases provide a greater boost to the economy than Treasury purchases. In addition, it will be important to hear how the Fed plans to determine future reductions. Of course, there is no guarantee that the Fed will announce a taper on Wednesday at all. Investors have taken positions based on their expectations for the Fed statement, and there likely will be a large reaction tomorrow afternoon following its release.
MBS prices are up nicely this morning, up 9/32nds. No economic data was released this morning. The Dow is also up. It is above 11,000 for the first time in 18 months. Last week was a great week for the mortgage market. MBS prices improved about 24/32nds during the week. Most of the improvement followed a very strong 10 yr Treasury auction. Strong demand and foreign participation fueled a rally in Treasury prices, which spilled over to MBS prices. Also kind to MBS prices during the week were the minutes from the 3/16 Fed meeting. The minutes showed that the Fed was nearly unanimous in their belief that Fed funds rates need to stay very low for an extended time and that inflation was not a concern. Next week will be full of significant economic announcements. On Wednesday both CPI and Retail Sales for March will be released and on Thursday Industrial Production will be released. Glen Corso, Executive Director of the Community Mortgage Banking Project, joined the show to discuss further the need to voice concerns about the 5% risk retention provisions in the current Financial Reform bill before the Senate. Glen described that passage of the bill with [...]