The Fed Has Caused Uncertainty

I read a lengthy article from Housing Wire on how the Fed’s retreat from the mortgage bond market is causing short-term uncertainty or even panic. The Fed quit purchasing new mortgage bonds in early March and mortgage rates were 4% and are now over 5%. Now the Fed wants to quit purchasing mortgage bonds that paid off due to sales and refinances. In February the Fed purchased $50 billion in mortgage bonds this way and now they want to drop this by $35 billion to $15 billion a month. OUCH!!!

The Fed purchased 32% of all new agency mortgage debt in February and their share will probably drop to < 10%. And its expected this drop will cause even more short-term disruption in the nation’s housing market. The $64,000 Question is who will buy additional mortgage bonds to replace the Fed? Commercial banks as of last December purchased 34% of all agency mortgage debt. Will they step up and buy more? Or will money markets and pension funds who typically purchase 5% to 6% of all agency mortgage debt? Will foreign investors who normally purchase about 11% of all agency mortgage debt? Or will life insurance companies and REITs? But, as the article noted there is little reason for these “money” managers to try to catch a falling knife with bond prices plummeting. Why? They may plummet even more causing rates to rise further. The agency mortgage debt market needs some stability and who will provide it? No one has an answer on who will provide this stability.