21 Feb The Fed Delivers the Gift We Hoped For
The Federal Reserve gave the mortgage bond market exactly what we hoped for yesterday, with the Meeting Minutes showing the Fed is likely at the end of the rate hike cycle and will soon announce a plan to once again start reinvesting the money that comes from their investment holdings back into mortgage bonds and treasuries. To better understand this, let’s take a step back into history.
Shortly after the Great Recession, the Federal Reserve started a program they called, Quantitative Easing, where they drove interest rates lower by investing into mortgage backed securities and U.S. Treasuries. Throughout the QE process, the Fed invested approximately $4.5 trillion, which caused interest rates to fall to record lows. As the U.S. economy reached a point where it no longer needed additional investments, the Fed stopped investing new monies but continued to reinvest money that would have fallen off their books due to the mortgages they owned being refinanced or sold. Eventually, they slowed the pace of reinvestment, until last October where they stopped reinvesting any of the monies and allowed their balance sheet to drop by about $50 billion per month.
With the Fed once again likely to become a purchaser in the mortgage bond market towards the end of 2019 or early 2020, this will align with my belief that rates will be lower in the longer term. Because of this, I would strongly consider using a no cost mortgage when locking in a rate. Take advantage of what we have now and set yourself up for another no cost loan if rates drop in the future.
After hitting the top of the trading channel, mortgage bonds made a technical move to the bottom. I expect this support level will hold. However, since the potential improvement to interest rate pricing is minimal, locking still makes sense.