“Markets on the Fed’s back”by Keith Gumbinger
November 5, 2010 — After preparing the markets for the last several months, the Fed pulled the trigger [last] week on its latest plan to boost the economy. “Quantitative Easing II” or QE2, as it’s being called, will see the Fed purchase $600 billion in new Treasury bonds by the end of the second quarter of 2011 — and this in addition to the expected $250 to $300 billion it will also reinvest from the maturing mortgage portfolio it holds from the last monetary stimulus program.
The open question is, will mortgage borrowers benefit, and if so, by how much?
Mortgage rates are already at rock bottom. HSH.com’s overall mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the average rate for 30-year fixed-rate mortgages eased by three basis points (.03%), ending HSH.com’s national survey at 4.61%. Important for first-time homebuyers and low-equity-stake refinances, FHA-backed loans are available at an average rate of 4.26%, while the overall average rate for hybrid 5/1 ARMs was 3.51% for the period. HSH.com’s public data series include rates for conforming, jumbo, and most recently the GSE’s “high-limit” conforming products and so covers much of the mortgage-borrowing public.
Not making money vs not losing any
In the post-financial-market-meltdown era, investors — particularly institutional and banking concerns — have been quite content to get money in their doors as cheaply as possible, either borrowing it at very low rates or attracting deposits from fearful customers interested not in making money but rather not losing any. Those cheap inbound funds have been plunked into Treasuries or other low-risk investments, and the spreads — even thin ones — between those two cash flows have produced acceptable and important profit streams.
With the American government borrowing money (issuing new Treasury Debt) at a record pace since the recession began, it was expected that the glut of this new Treasury supply would flood the market and outstrip demand; in turn, this would cause interest rates to begin to rise, particularly as the economy emerged from recession. Amid a shaky recovery and overseas market panics, this situation never occurred, and there has instead been a steady appetite for investments which are considered safe.
Plan: Steer investors to mortgages
The Fed’s plan is to snap up so many of these Treasury bonds that they drive up the price of them, which in turn drives down their yields. In this way, investors won’t be able to make money easily by buying these low-yielding instruments, and so will find an incentive to put their money into equities, other bonds, commodities, wherever… but the effect is hoped to be a deconcentration of investment dollars, spreading money around the broader economy… if it works.
Concentrations of money into a single class of investments isn’t healthy. You can see how this played out in any number of bubbles, from tech stocks to mortgages. That said, money now concentrated in Treasuries may simply move en masse into oil, commodities or other narrow channels which too might produce undesirable economic effects.
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