Interest rates still ignoring impact of tapering



Here we are roughly 6 months into the Federal Reserve’s Tapering program, and interest rates have yet to skyrocket as most analysts (and this blog) expected. Not only are interest rates not higher, but rates are lower today than they were at the start of the year. The Federal Reserve has been a major purchaser of mortgage backed security bonds (MBS bonds) for years, yet their slow drawback out of the market is having virtually no real impact thus far. Why?

A previous post on this blog detailed some of the reasons behind this. World events that can destabilize economies, poor economic numbers, and poor economic outlooks all impact MBS bonds in a positive way. MBS bond prices go up, rates go down.

Another impact is the amount of MBS bonds available for purchase. The first quarter of 2014 saw the fewest number of loan originations in roughly two decades. Fewer closings means fewer MBS bonds available to buy. Even with the Federal Reserve reducing the amount of MBS bonds they are buying, the Feds are actually purchasing a larger percentage of the market than they were during the height of their Quantitative Easing program. With less money made available, the Federal Reserve is still the largest buyer in the MBS bond market.

Instead of rising, interest rates have improved with a combination of world events, poorer economic outlooks in developing economies, and the Federal Reserve’s continued use of Quantitative Easing. At some point, the Quantitative Easing will come to an end. The Federal Reserve will be out of the market, and rates will rise. In fact, it might be good to see some rise in rates as it could signify economic growth. Until it happens, let the good times roll with the lower rates!



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