Mortgage-Bond Yields Little Changed After Fed Taper AnnouncementJody Shenn
Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates were little changed after the Federal Reserve said it would reduce its monthly purchases of government-backed home-loan bonds by $5 billion starting next month.
A Bloomberg index of Fannie Mae’s current-coupon 30-year securities rose 0.01 percentage point from before the announcement to 3.53 percent as of 3:30 p.m. in New York. That’s an increase of 0.04 percentage point from yesterday.
The yields have jumped from as low as 2.28 percent in May when speculation first mounted that the Fed was poised to pare its $85 billion of monthly debt purchases that have included $40 billion of agency mortgage bonds. Treasury purchases are also declining by $5 billion a month, with Fed Chairman Ben S. Bernanke saying at a news conference that policy makers decided an equal reduction was the “simpler way” to begin.
“The markets had it right and had a small taper priced in,” said Scott Buchta, head of fixed-income strategy at brokerage Brean Capital LLC. “It also shows that the market can handle a gradual reduction in asset purchases.”
A measure of mortgage applications released today suggests that issuance of agency home-loan bonds will fall to $65 billion per month, “exactly what the Fed is currently buying” when including its reinvestments with proceeds from previous purchases, Walt Schmidt, a strategist at FTN Financial, said in a note to clients before the announcement.
An important reason why “tapering is not only necessary but probably beneficial to the market is that supply is quickly dwindling,” Schmidt wrote.
The Mortgage Bankers Association application index dropped 5.5 percent last week to the lowest level since December 2000, after declines this year driven by a slump in homeowner refinancing caused by higher interest rates. The average rate on a typical 30-year mortgage rose to 4.42 percent last week from a record low 3.31 percent in November 2012, Freddie Mac surveys show.
A measure of relative yields on the Fannie Mae current coupon mortgage-backed securities, or those trading closest to face value, was unchanged today. The bonds yield 1.33 percentage point more than an average of five- and 10-year Treasury rates, down from as high as 1.51 percentage points in July, according to data compiled by Bloomberg.
The central bank’s “slow motion approach to cutting MBS purchases should take some of the pressure off” the types of the debt the Fed is buying “as worst case fears should now taper far more quickly than the program itself,” Ken Hackel, the head of securitized product strategy at CRT Capital Group LLC, said in a note to clients.