Traders eye Fed pullback on mortgage bonds

Housing boom gives central bank less reason to support market

National /
Jun.June 10, 2021 12:00 PM
Federal Reserve Chair Jerome Powell (Getty)
Federal Reserve Chair Jerome Powell (Getty)

Mortgage traders have eyes on the Federal Reserve’s purchasing of mortgage bonds.

With the housing market booming and lending rates still low, suspicions are growing that the Fed will no longer keep buying $40 billion worth of mortgage bonds every month, Bloomberg News reported.

Mortgage-backed securities lost 0.18 percent in May while Treasuries gained, the worst underperformance since January 2020, the publication reported. Robert Kaplan, president of the Dallas Federal Reserve Bank, said that the housing market doesn’t need as much support as it’s been getting from the central bank.

“If the Fed is getting worried about inflation and wants to do something, they should pull from mortgages and go more into Treasuries,” Jake Remley, a senior portfolio manager at Income Research + Management, told the publication.

Fed chair Jerome Powell has not tipped the central bank’s hand, but backing off on mortgages would give it more leeway to support the Treasury market as President Joe Biden aims to implement his national infrastructure plan, which could require hefty borrowing.

U.S. consumer prices jumped last month, driving up 10-year breakeven rates, which is a bond-market proxy for the annual inflation rate expected over the next decade, Bloomberg News reported.

Not only has the Fed been buying mortgages, it’s also been adding $80 billion of Treasuries to its balance sheet every month. Participants at its April meeting said it should discuss scaling back this amount should the economy continue to make rapid progress, the publication reported.

Some industry experts think the Fed could discuss plans to scale back on bond purchases as soon as this summer, Bloomberg News reported. Others think that it is unlikely that the Fed will pull back from the mortgage market first, but instead will opt for its 2014 model, when it slowed purchases of Treasuries and mortgage-backed securities at the same pace.

“That’s the path we think they are most likely to go down because it’s the simplest to communicate and it doesn’t necessarily have any unintended consequences,” said Alex Roever, head of U.S. rates strategy at JPMorgan Chase.

[Bloomberg News] — Cordilia James






    Related Articles

    arrow_forward_ios
    Michael Nourmand (Facebook via Nourmand & Associates)
    Compass tries to recruit brokerage owner Michael Nourmand
    Compass tries to recruit brokerage owner Michael Nourmand
    Joel Singer (California Association of Realtos)
    California Association of Realtors CEO to retire
    California Association of Realtors CEO to retire
    PocketList shuttered after having formally launched in L.A. last July. (Getty, PocketList)
    Spencer Rascoff-backed rental listing platform shuts down
    Spencer Rascoff-backed rental listing platform shuts down
    Blackstone CEO Stephen Schwarzman (Getty, iStock)
    Blackstone buys San Diego apartment complexes in $1B deal
    Blackstone buys San Diego apartment complexes in $1B deal
    10745 W. Burbank Boulevard in North Hollywood (Google Maps)
    Developer eyes apartment complex in North Hollywood
    Developer eyes apartment complex in North Hollywood
    Rendering's of Byron Allen's future mansion. (Getty, Landry Design Group)
    Media mogul Byron Allen is building a Beverly Hills megamansion
    Media mogul Byron Allen is building a Beverly Hills megamansion
    (iStock)
    SoCal home prices keep rising while supply dwindles
    SoCal home prices keep rising while supply dwindles
    PG&E CEO Patricia K. Poppe, San Diego Gas & Electric CEO Caroline Winn and Southern California Edison CEO Kevin M. Payne. (Getty, PG&E, SDGE, Edison)
    PG&E among utilities looking to cut subsidies on solar homes
    PG&E among utilities looking to cut subsidies on solar homes
    arrow_forward_ios

    The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

    Loading...