Fed May Announce Third Round of Purchases, TD’s Gilhooly Says

The Federal Reserve is likely to announce next week a round of asset purchases focused on mortgages to bolster President Barack Obama’s efforts to help debt-strapped homeowners refinance, Toronto-Dominion Bank’s Richard Gilhooly said.

The program would follow the central bank’s acquisition of $2.3 trillion of debt to spur the economy in two earlier rounds of what’s called quantitative easing. The Federal Open Market Committee, which meets Nov. 3, may commit as much as $500 billion to the buy mortgage debt to keep long-term borrowing costs down, Gilhooly, an interest-rate strategist in New York at the firm’s TD Securities unit, said today in a phone interview.

“The Fed is going to do QE3,” Gilhooly said. “They’re going to come in and buy mortgages.”

The move may counter the impact of sales of Treasuries by lenders hedging new loan production, and it would address the rising supply of longer-term debt in the market, Gilhooly said. Traders speculating that more refinancings are on the way have fueled a rise in longer-term Treasury yields, Gilhooly said.

Treasuries fell today as European leaders at their second crisis summit in four days persuaded bondholders to take a 50 percent loss on Greek securities and boosted Europe’s rescue fund to 1 trillion euros ($1.4 trillion).

U.S. 10-year note yields reached 2.41 percent today, the highest level since Aug. 9. Thirty-year bond yields touched 3.45 percent, the most since Sept. 2.

Mortgage Rates

The average rate for a 30-year fixed loan declined to 4.10 percent in the week ended today, from 4.11 percent on Oct. 20, Freddie Mac said in a statement. The average 15-year rate held at 3.38 percent, according to the McLean, Virginia-based mortgage-finance company.

The Federal Housing Finance Agency said Oct. 24 it would allow qualified homeowners to refinance no matter how much their homes have declined in value, expanding the terms of the 2009 Home Affordable Refinance Program. The agency, which oversees Fannie Mae and Freddie Mac, said it would also eliminate some fees, reduce others and waive some risk for lenders.

A decision by the central bank to buy home-loan debt would “make sure that in the next six months there’s a significant stimulus via the mortgage market to the housing market,” Gilhooly said. In holding down mortgage rates, “the Fed would be in a stronger position if they prepared to add to their mortgage holdings,” Gilhooly said.

New York Fed President William C. Dudley said Oct. 24 that the central bank wants to keep mortgage interest rates from rising too much and may do more to hold down borrowing costs.

Dudley’s View

The Fed’s decision last month to reinvest proceeds from maturing housing debt into mortgage-backed securities was a “signal that we do have concern about the level of mortgage spreads,” Dudley said. “Clearly we’ve indicated our interest in supporting the housing market” and keeping yields from “getting too elevated.”

Policy makers approved the action as part of an effort to spur the economy with lower borrowing costs by replacing $400 billion of short-term Treasuries in the Fed’s portfolio with longer-term bonds.

U.S. gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, matching the median forecast of economists surveyed by Bloomberg News and up from a 1.3 percent gain in the second quarter, Commerce Department data showed. Household purchases, the biggest part of the economy, gained at a more-than-projected 2.4 percent pace.

Fed officials are developing options for further monetary easing even as better-than-forecast economic reports have allayed concerns the U.S. may relapse into a recession. Fed Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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