THE BASIS POINT

WeeklyBasis 10/16/10: Quantitative Easing 101 (Part 2)

 

Why Rates Rose Week of October 11
Rates ended last week up .125% so they’re now just above extreme record lows resulting from speculation the Fed will announce more rate stimulus early November. Rates didn’t react much to tame consumer and business inflation reports for September and so-so retail sales. The rise was more because of $66b in poorly received Treasury auctions throughout the week ($32b 3yr notes, $21b 10yr notes, $13b 10yr bonds).

The Treasury auctions reminded overall bond markets, including mortgage bonds that rates are tied to, that bond supply is neverending and prices may be too high. So investors sold mortgage bonds to take profits, and this pushed rates higher. Fed rate stimulus fervor will continue next week (more on this below), and despite even the best long-term arguments against more Fed stimulus, the low rate impacts are happening right now—not later. Here’s why.

Quantitative Easing 101 (Part 2)
The stimulus we’re talking about is quantitative easing (QE), which is when the Fed prints money to buy bonds. When bonds prices rise on this buying, rates drop. But as we showed last week, rate drops are most likely to come before the Fed actually starts its buying because markets buy those same mortgage and Treasury bonds before the Fed.

So by the time the next round of QE is announced—most likely November 3—the consumer mortgage rate impacts will most likely already be felt. See last week’s rate timeline for evidence of this.

It’s also important to note that the Fed is creating new dollars—or printing money—to engage in QE, and one of the risks of this is that it devalues the dollar. If the dollar devalues too much as the Fed proceeds from here, investors would sell dollar assets like mortgage and Treasury bonds in search of better returns elsewhere. That would cause those bond prices to drop and rates to rise.

Beginning today and continuing through next week, there are 12 public speeches on monetary policy and economic outlook by senior Fed officials, and most support a new round of QE.

But just remember this: Markets trade while economists and Fed officials chatter. And the low rate trade is happening as you read this.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 4.25% (4.37% APR)
FHA 30 Year: 4.25% (4.37% APR)
5/1 ARM: 3.125% (3.24% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 4.75% (4.87% APR)
FHA 30 Year: 4.375% (4.49% APR)
5/1 ARM: 3.875% (3.99% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.125% (5.24% APR)
5/1 ARM: 4.0% (4.13% APR)

 

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