There are good reasons why MBS rates rose; the Fed’s exit from the market isn’t one of them.
Don’t blame the Fed for this one. Last week, mortgage rates jumped. But that isn’t because the Federal Reserve’s $1.25 trillion program to buy mortgage-backed securities formally ends on Wednesday.
In fact, the difference between mortgage rates and Treasury yields remains near the record low engineered by heavy Fed purchases over the past year. It shows little sign of widening sharply, even as investors prepare for that prop to be removed.
The Fed’s completion of its MBS-buying program has been so well publicized, even “The Situation” knows it’s coming. It isn’t likely to sneak up on or shock anybody. And the Fed has been so slowly whittling down the size of its purchases, the market (it hopes) won’t even notice on Thursday when it’s not in there buying.
It will be interesting, though, to see how things fare further down the risk curve. That $1.25 trillion went somewhere, and you can bet a good slug found its way into the stock market, as well as other asset classes. Now, even though the Fed’s going to be done buying on Wednesday, it won’t be done paying for some time. The central bank itself notes that payments can take up to 180 days, and in its most recent statement, it listed $98 billion yet in commitments it has to pay on. That ain’t chump change. It may not be 180 days; likely it’ll be more a matter or several weeks, possibly dribbling into even June. So there’s some odds that the program may yet yield some liquidity to the marketplace.
But still, this was a big program, and it’s over. The housing market, the stock market, the economy for that matter, they’re losing a big, big buyer. We’ll see how they fare without the support.