THE BASIS POINT

Rates Up After Fed Meeting: Side by Side Fed Statements

Below is a side by side comparison of Fed statements from today vs. the last Fed meeting April 25. They extended Operation Twist, a program where the Fed trades shorter term debt for longer term debt, kind of like a homeowner would refinance from a shorter term ARM to a longer-term fixed rate loan if they thought they were going to hold their debt longer than originally expected.

Yesterday in my commentary for MortgageNewsDaily, I said the following:

I’m locking newly ratified purchase clients (and some refi clients who’ve been holding for even lower lows) before the Fed meeting to avoid “buy the rumor, sell the news” MBS trading scenario. In English, that means MBS have been bought to near-record highs (pushing rates to near-record lows) ahead of a Fed meeting where it’s expected that the Fed will commit to buying more MBS. Even if they do, or especially if they don’t, a lot of this is likely to be priced into MBS already.

This was a tough call but I got it right because the Fed wasn’t explicit about any further MBS buying today. That’s why MBS are selling off rather sharply today after the announcement (FNMA 3.5 coupon -42 basis points), and rates rise when bond prices drop on a selloff.