Mortgage backed securities ended up slightly yesterday in a volatile day of trading. We are seeing a continued rally this morning on mixed-to-poor domestic economic data (although it is worth noting that the market could easily pivot if home sales come in better than expectations at 10am). As the sequester cuts approach in earnest, I believe that we could see further rallies in Treasuries and mortgage backed securities, which could lead to improved mortgage rates over the next couple of days.
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So the “big” news of the day yesterday was the Fed minutes. They seem to show a Fed increasingly divided over the duration and the effectiveness of the current asset purchase program (the Fed is presently purchasing $85 billion in mortgage backed securities and Treasuries every month in order to keep interest rates low). From the minutes:
“Several participants emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved.”
Honestly, no real surprise here. The hawks have been saying similar things for quite some time now, and will continue to do so. On the other hand:
“Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions.”
Again, not real surprising. Unemployment is still high and inflation is still low, and given that the doves outnumber the hawks, I don’t think we’ll see much deviation from our current path in the near future. Of course, that doesn’t mean that the Fed shouldn’t be planning some sort of exit strategy that seeks to minimize the inevitable disruption that a change in policy will cause.
Although the minutes indicate that the hawks are becoming more vocal about the perceived drawbacks of “highly accomodative” policy, they are in the distinct minority amongst the voting members of the Fed. I think the asset purchases will continue at this pace for at least another couple of months, which should help to keep rates low.
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