Why Mortgage Rates Are Up Despite More Fed Quantitative Easing

Yesterday’s market was a roller coaster with rates up big in the morning then regaining some ground by market close. Jobless Claims decreased by 24k suggesting labor market improvement, and the trade deficit narrowed slightly due to the dropping dollar pushing exports. China downgraded U.S. debt and the 30yr Treasury bond auction was poorly received with the smallest bid-to-cover ratio (a measure of demand) in a year. Mortgage bond prices were down 28 basis points (which causes rates to rise), then the Fed announced how it would roll out Quantitative Easing round two—announced last Wednesday as a plan to buy $600 billion in Treasury securities to stimulate the economy with lower consumer and business rates.

After the Fed said it would kick off QE2 by buying $105b in Treasury securities November 12 through early-December, buyers returned to Treasury and mortgage bond markets, mortgages improved to end the day up 6 basis points, so rates dropped a bit. Still rates have risen since last Wednesday’s Fed announcement for two main reasons: (1) mortgage bonds experienced a massive rally ahead of the announcement pushing rates down, but since the Fed revealed their quantitative easing plans exclude further mortgage bond buying, mortgage bonds have sold off and (2) improving jobs data Friday and yesterday, while far from a permanent rebound, sets an optimistic economic tone which causes bonds to sell. In both cases, when mortgage bond prices drop during selloffs, yields (or rates) rise. Here’s a Q&A on quantitative easing.