As expected, the Federal Reserve made no changes to interest rates following their two-day meeting that ended yesterday. Further, they made no mention of how or when they will be reducing their balance sheet. Of the roughly $4 trillion in invested assets held by the Fed, about $1.8 trillion of that is held in mortgage backed securities. We feel that either later this year or early 2018 they will begin the process of reducing their balance sheet. It will likely be a slow and quiet process where they stop reinvesting proceeds from maturing securities. This passive way of shrinking the balance sheet will have less of an impact to mortgage rates than a more aggressive approach of selling securities. Since October of 2014, the Fed has been reinvesting such proceeds, which has essentially kept their balance sheet the same. However, since they will no longer be buying mortgage bonds at some point in the future, mortgage interest rates will increase to reflect the lower demand as a result.
Tomorrow’s Bureau of Labor Statistics (BLS) Jobs Report release has bond investors on edge this morning. Prices have fallen beneath their 25-day moving average and are heading down to a multi-layer floor of support provided by their 50 and 100 DMA. Given the recent months’ low level of job growth as reported by the BLS, it seems likely we will see stronger numbers for the month of April. The market is now expecting 185,000 new jobs reported. We feel this could easily be attained. Also hurting the bond market, is another run at repealing and replacing Obamacare. A vote is likely in the works for today. With many prominent republicans touting that they have sufficient support this time around, mortgage interest rates could be in for another move higher if this bill is to pass. Be on guard and watch the markets closely. The rest of the week could be action packed.
Given the inherent risks associated with the anticipated vote as well as tomorrow’s BLS release, we will maintain our locking bias.