THE BASIS POINT

Rates Drop More As Fed Buys Mortgage Bonds

Yesterday the Fed confirmed their pre-Thanksgiving commitment to buy $500b in Fannie/Freddie bonds to push mortgage bonds. They they’ve hired BlackRock, Goldman Sachs, PIMCO and Wellington to manage the purchases which are set to begin early January.

Mortgage bonds have already had another rally on the news. For obvious reasons, investors want to get in ahead of this purchase program. When the Fed buys mortgage bonds, it caused bond prices to rise and yields (or rates) to fall. We can’t count on a full effect of $500b in investment, because the announcement has caused billions already to go into mortgage bonds which has caused the massive rate drops we’ve already seen. So these investors will begin taking profits and selling as the Fed steps in with buying. More to come on rate targets borrowers should be thinking about.