Mortgage-Bond Yields Soar to Highest in Four Months on QE DoubtJody Shenn
Yields on mortgage securities that guide U.S. home-loan rates jumped to the highest in almost four months as the minutes of a Federal Reserve meeting signaled the central bank’s bond buying may end this year.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value rose 0.07 percentage point to 2.34 percent as of 3 p.m. in New York, the highest since Sept. 12. That was the day before the central bank announced plans to add $40 billion more of government-backed home-loan securities to its balance sheet each month.
Fed policy makers said they will probably end their purchases of the debt and $45 billion of Treasuries each month sometime in 2013, with Federal Open Market Committee members divided between a mid- or end-of-year finish, according to the record of its Dec. 11-12 gathering released today in Washington. That assessment of its so-called quantitative easing, or QE, program was a “big surprise” to the bond market, according to Jim Vogel, a debt analyst at FTN Financial in Memphis, Tennessee
Higher bond yields “point to the Fed’s very real QE dilemma,” Vogel said in a note to clients. “When it signals an end to QE, higher rates could endanger the very recovery that is improving the labor market conditions. Look no further than how many bullish economic forecasts for 2013 lead with a better housing market.”
Yields on the Fannie Mae bonds widened about 0.03 percentage point relative to an average of five- and 10-year Treasury rates, to 0.99 percentage point, according to data compiled by Bloomberg. That’s 0.01 percentage point less than the average during the past three months, and up from a record low of 0.55 percentage point on Sept. 25.
The Fed minutes were “somewhat bearish” for spreads and an end to its buying in the third quarter may mean they “find a floor at current levels,” Nomura Securities International analysts led by Ohmsatya Ravi wrote in a note. “Most” traders and investors had been “expecting the Fed’s purchase program to continue at least until the end of 2013,” they said.