Traders eye Fed pullback on mortgage bonds

Housing boom gives central bank less reason to support market

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.

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Lower demand for refinancings has caused purchase loans to take a larger share of the market. (iStock)
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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.

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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

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