Why Mortgage Rates Could Rise

The Fed is reducing its purchases of mortgage bonds and has been doing so over the last 3 weeks. At its peak the Fed was buying as much as $30 billion a DAY in mortgage bonds. Last week their purchases dropped to about $8 billion a day and this week their goal is to reduce their purchases to $6 billion a day. For perspective, the Fed during the peak of official Quantitative Easing purchased $40 billion a MONTH. So, at $6 billion a day that is about $120 billion a MONTH.

However, the 2.5% mortgage bond is currently sitting at its 25 Day Moving Average. If the Fed’s reduced buying causes the 2.5% bond to drop below its 25 Day Moving Average, the next floor of support at the 50 Day Moving Average is 110 basis points LOWER! This means we could see mortgage rates increase by 3/8% soon.