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Mortgage
Rates Rise on Weak Auctions
A
combination of factors was negative for mortgage markets this week, and
mortgage rates ended higher. Large budget deficits and economic troubles in
smaller European Union nations made bonds less attractive to global
investors. In addition, stock market gains sent the Dow to an 18-month
high, which pulled funds out of fixed income investments. Finally, with
just one week remaining for the Fed's MBS purchase program, comments from
Fed Chief Bernanke about potential future MBS sales added to the pressure in
mortgage markets.
For
months, investors have been concerned that the enormous supply of debt
needed to fund US government spending would force yields on US Treasury
securities to rise to attract purchasers. This is what took place this
week. Demand was surprisingly weak at all of this week's record Treasury
auctions, especially from foreign investors, and yields were pushed higher.
Since mortgage-backed securities (MBS) compete for investors with
Treasuries, MBS yields rose as well, pushing mortgage rates higher.
In a
speech on Thursday, Fed Chief Bernanke added to the volatility in mortgage
markets with his comments about the possible timing of future sales of MBS
from the Fed's portfolio. To support the economy, the Fed has purchased
almost $1.25 trillion of MBS since the start of 2009. The Fed has made
clear from the start that it was a temporary measure and that it would
eventually sell its MBS holdings when the economy was healthy enough.
Earlier this month, Bernanke stated that he did not expect the Fed to sell
assets "in the near term". On Thursday, however, his language
changed a little. While Bernanke assured investors that MBS sales would be
gradual and that they would only take place if the economy were strong
enough to handle it, he opened the door for the start of Fed MBS sales at
an earlier date than previously anticipated.
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