Will the Fed stop buying mortgage loans? – Orange County Register


Mortgage brokers are betting their market is leading the way as the Federal Reserve begins a major cut on its massive bond purchases.

This will be the last pullback in 2014, a break from the Fed’s balanced approach, where purchases of Treasury securities and mortgage-backed securities have slowed at the same pace. However, as house prices skyrocket and lending rates are not far from an all-time low, some believe central banks continue to add $ 40 billion in mortgages to their balance sheets each month.

Traders are trying to stay ahead of the Fed’s decision, which is already expected to spill over into financial markets. Dallas Federal Reserve Governor Robert Kaplan said last week he was not thinking about the housing market, and despite the rise in government bonds, mortgage-backed securities fell by 0, 18% last month, the worst performance since the early days of the pandemic. Checked in. We need all the support we can get from a central bank.

J. Clemley, senior portfolio manager for Income Research + Management, said: He is overseeing $ 90 billion and reducing his exposure to some of the mortgage markets most affected by the Fed downturn. “If the Fed is worried about inflation and wants to do something, it needs to get out of its mortgages and get into government bonds.”

The Fed’s intervention in the housing market has long been controversial, although it began in 2008 after a housing bubble burst that has choked the industry over the years.

This time around, the Fed helped push mortgage rates to record highs. Real estate prices soared with the Fed buying, with national house price readings in March rising 13% year-on-year, the highest since 2005.

Indeed, Federal Reserve Chairman Jerome Powell is not suggesting that the central bank will target the mortgage market, nor when to start phasing out debt purchases. However, the withdrawal of mortgage-backed securities gives authorities more bandwidth to support the treasury market, as President Joe Biden seeks to pass key spending plans, including the national infrastructure program. Probably.

The Federal Reserve buyout helped lower interest payments on the national debt last year, despite an increase in bond issuance to fund a pandemic bailout. Treasury Secretary Janet Yellen also said low debt repayment costs left room for the administration to set up a program. The Congressional Budget Office projects a deficit of $ 2.3 trillion in 2021, after exceeding $ 3 trillion last year. These are the biggest deficits in the economy since World War II.

George Gonçalves, head of macro strategy for the United States at Mitsubishi UFJ Financial Group, said: “It will be adjusted. And given our budget deficit, the treasury market is the one that needs the most help.

Speculation on Thursday suggests the Fed may start adjusting monetary policy in the coming months, after new data shows U.S. consumer prices topped most economists’ expectations last month. Started. This raised the breakeven point for 10 years. It is a substitute for the bond market with the annual inflation rate expected over the next decade.

In addition to buying mortgage loans, the Fed adds $ 80 billion in cash to its balance sheet each month. Although he says he will maintain that pace, the minutes from the April meeting may be appropriate for discussing that if the economy continues to “grow rapidly” many participants will reduce it. He indicated that he did not.

Walt Schmidt, head of mortgage strategy at FHN Financial in Chicago, said the Fed will use one of its meetings later this summer or its August meeting in Jackson Hall, Wyoming, to buy bonds. He said he could start talking about plans to delay.

The Fed’s mortgage holdings rose to around $ 2.2 trillion as a result of subsequent acquisitions since the pandemic. This is well beyond the duration of previous quantitative easing policies. This focused on newly generated mortgage debt and helped raise interest rates on 30-year fixed rate loans to a record high of 2.65% in January. By 2020, the agency’s net mortgage-backed securities issues have more than doubled from the previous year, reaching $ 508 billion, the highest since the peak of the housing bubble in 2007.

But not everyone is convinced that the Fed will pull out of the mortgage market first. Alex Rover, head of US interest rate strategy at JPMorgan Chase and Company, said this was a possible scenario and could allow central banks to focus on bonds of state. Follow the 2014 model.

“This is how we think they are most likely to go down because communication is the easiest and doesn’t always have unintended consequences,” Roever said.

But Boston Fed Governor Eric Rosengren didn’t see an industry in need of continued Federal Reserve support last month, so he seems open to cutting mortgage purchases faster than bonds. State when the time comes. It was.

“There is a debate about the composition of the balance sheet, regardless of the state of the real estate market,” said former Fed Chairman Randall Kroszner, now a professor at the Booth Business School at the University of Chicago. . “I think the Fed might pull out of mortgage-backed securities sooner than Treasury securities.”

Will the Fed stop buying mortgage loans? – Orange County Register Source link Will the Fed stop buying mortgages? – Orange County Register

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