PIMCO: 30yr Mortgage Rates To Drop 0.5% to 1%

Following the Fed’s announcement last week that they would buy $100b in Fannie and Freddie debt plus buy $500b in Fannie, Freddie, and Ginnie mortgage backed bonds, rates on conforming loans dropped by about .625%. If a borrower with 720 credit and a 20% down payment were looking at rates today, a 30yr fixed rate on a loan up to $417k is about 5.375% and the rate on a loan up to $625k is about 5.625% (although mortgage bonds are trading worse at the moment so rates might go up slightly today).

PIMCO chief Bill Gross said today that 30yr rates may drop another 1% when the Fed actually starts their purchases. Most of the initial drop was just on the news, as traders bought up Fannie/Freddie bonds which pushes the yield (or rate) down. When the Fed purchases actually begin, PIMCO thinks that it could drop another 50-100 basis points. If you’re in the market for a refi, get your documentation to your lender now so all they have to do is lock you. When this rush becomes more intense than it already is, it’s going to be hard to get loans done in time on traditional lock periods of 30 days. Get a head start now.

“We think the 30-year mortgage rate will come down another 50- to 100 basis points” as a result of the government purchases of housing-related securities, said Bill Gross, chief investment officer of Pacific Investment Management Co. or Pimco, speaking on CNBC television.

He said Pimco had not bought U.S. Treasuries at current yield levels near five-decade lows, with the benchmark 10-year Treasury note yielding about 2.7 percent.

“Pimco hasn’t taken that side of the trade in terms of buying governments (securities),” Gross said.

But because of Federal Reserve steps to inject massive liquidity into the banking system and bolster parts of the fixed income markets, Treasury yields will be much lower than previously expected for the next several years, he said.

Gross held out some hope of stability in the U.S. stock market, perhaps in 2009, because of government stimulus measures for financial markets and the economy, he said.

Gross manages the $127 billion Pimco Total Return Fund and helps oversee the more than $790 billion in assets under management at Pimco.