FED Continues to Taper. Is a Bubble forming in the bond market? Has QE run its course? Where are rates headed!
The Fed will continue to tapper 10 Billion per month on their QE bond purchasing program (will purchase 55 Billion in the next 30 days down from 65 Billion). We anticipate this will continue month over month as Unemployment (despite the bad weather) has continued to improve and world economic issues (Global issues with Russia and Ukraine which have been pressuring US and other world markets) are expected to improve in the coming months (remember, bad domestic and global economic news generally causes rates to go down, good news causes rates to go up). The Fed also announced it will begin raising its Fed Fund rate (rate at which the Federal Reserve lends money to banks) within 6 months after the QE bond purchasing program ends. This is HUGE news for rates as the previous senses was they would not raise the FED FUND RATE for CONSIDERABLE time or even within our own lifetime
after the QE bond purchasing program ends. Today, the bond market sold off nearly 100 Basis points (1.00%) and rates went up nearly .25% in one trading session (15 and 30 year fixed) following the news.
To put QE in perspective: Before the recession in 2006, The US Federal reserve held 700 Billion in mortgage backed securities. Today, the fed holds nearly 2.1 trillion of all US mortgage debt and the number will continue to rise month over month until the QE bond purchasing program is finished (estimated in November of this year).
There will be a tipping point where buying mortgage bonds will no longer be a way to artificially keep rates low as the fed will own nearly all US mortgage debt and the QE bond purchasing program will have run its course (bubble in the bond market). This tipping point could hit as early as June of this year and already many large institutions are hedging themselves for a higher rate environment before QE is over. We don’t know if this will happen before the Fed completes its QE bond purchasing program but all economic indicators are pointing at significantly higher rates by late summer. Rates on all fixed products (10 year, 15 year, 20 year and 30 year fixed loans) are still are still at historic lows but not for long.
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