Extra Extra...Fed Announces $750 Billion More!

From my Friends at Intero Mortgage~

Big news hit the wires yesterday afternoon, as the Fed made a blockbuster announcement that sent Mortgage Bonds into rally mode. The Federal Reserve announced that over the course of 2009, they will purchase an additional $750B of Mortgage Backed Securities in an effort to help shore up the housing market and keep home loan rates low. They had already committed to buying $500B which started in January and was to run until June of 2009. Now they’ve committed this additional $750B to keep the program running until the end of the year or more. On the announcement, Mortgage Bonds exploded higher, leaving prices within whiskers of the best levels ever.

However, most of the media talks and news paper articles this morning are over stating what will take place. The rates will not necessarily drop to 4.5% because of this move. Rather the interest rates will be based on which coupons the Fed purchases. The Fed has not said that they will be buying the lower 4.0% or 4.5% coupon of Fannie/Freddie securities. They’ve not said what coupon level it will be at this point in time. This move will however, help to prolong the interest rate environment that we are already in! And because lenders are still not working at max capacity, they are very likely not going to pass all the gains through to the consumer. The good news is that perhaps this will help lenders feel more comfortable staffing up a bit, as this purchase program will certainly keep rates from moving significantly higher any time soon. Bottom line - although the media is already spinning it differently, this is still not a time for clients to stay on the fence, hoping and waiting for lower rates. Home loan rates remain within inches of all-time historic lows, but may not necessarily move significantly lower based on this purchasing plan - waiting is a very risky move.

The Fed also said they will purchase $300B in long term Treasuries...so why Treasuries? The Fed wants to keep the spread between Treasuries and Mortgage Bonds from widening, because as Mortgage Bond prices move higher, the yield or return on them may not be as attractive as those available in Treasuries. So if the Fed buys Treasuries, the yield on those instruments will also be driven lower, thereby keeping a normal spread between Treasuries and Mortgage Bonds.

Now...something else worth paying attention to - since yesterday's Fed Meeting, the US Dollar has gotten clocked, as the aggressive Fed moves appear quite inflationary. In turn, this has pushed Oil up to $51 per barrel, nearly $5 higher since yesterday afternoon. Gold, which is purchased as a hedge against inflation, is up near $950 an ounce - moving up $60 on the day! While we know there is no inflation at the present time, the chatter of future inflation could have a negative effect on Mortgage Bond prices ahead, or at least stifle their moves higher - yet another reason not to wait and to take advantage of the current historically low rates.

All this being said, we have seen the past a “honeymoon” phase after big announcements like this. That’s likely why bond prices improved dramatically yesterday, and rates are looking very good this morning! They honeymoon phase usually doesn’t last long as investors wake up to the reality of the situation as stated above.