Talk about your conflicts. Interest rates, the determining factor for consumers and businesses known also as the cost of borrowing money, are about to go up. Or perhaps they will go down. Maybe these rates will stabilize and nothing much of anything will happen in the short-term (which is the greatest worry) or the long-term (which is worrisome but something that most borrowers can plan for well in advance). So which is it?
The Federal Reserve kept mortgage prices from falling too far in the wake of the economic downturn by pumping $1.25 trillion in the mortgage backed securities market. Purchasing so many of these securities essentially helped to buoy the economy when it needed the help most. But Pacific Investment Management Co., manager of the world’s biggest bond fund commonly known as PIMCO is now suggesting that too many of these bonds were sold in the previous years. This suggests that there is an appetite for MBS investments at exactly the same time the Fed is suggesting it will begin raising rates.
Mortgage rates have been all over the board in the past year, fluctuating between 5.74% and 4.85%. This has kept buyers on edge wondering whether these rates will stabilize or go higher. Recent Fed minutes suggests they will go up. The Fed does not set the interest rates for the housing markets but their interest rate decisions do have a ripple effect.
Even as the most recently published S&P/Case-Shiller cost index of home prices reports a 0.3% increase in housing prices in 20 U.S. cities for January, which to those who read these numbers as a sign of continued recovery, most bond investors are not so sure. A real recovery would need to show some serious price inflation on homes before this market could be pronounced fully recovered.
What has PIMCO and other big fixed income buyers concerned is the potential absence of the big buyer (the Fed) who has kept prices higher even as the yields were low. Remove the Fed and the yields will no doubt go up. And as one trader warned, a move of as little as 0.15% could begin the mad rush which would push prices higher. And that means higher rates for home buyers.
Right now, it is anyone’s guess. If the MBS market shows signs of interest from investors, nothing might happen in the short-term. If the reverse is true, then this market might erupt. Or not.
Additional reading can be found here from Garfield Reynolds and here from Nelson D Schwartz.
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