Join        Login             Stock Quote

What Drove The 30Yr Mortgage Rate Higher?

 February 12, 2013 04:44 PM

After this post in early December discussing the possibility that MBS, particularly the 30yr FNMA had become a "crowded trade" and mortgage rates may have bottomed, we've received numerous e-mails arguing that based on the Fed's recent actions, agency MBS has more upside. Furthermore, the US consumer got so used to mortgage rates constantly moving lower, the reversal of that trend - even a temporary one - seemed unfathomable to many. But that is in fact what happened, as the 30yr mortgage rate stopped declining.
Source: Bankrate.com

[Related -Emerging-Markets Stocks Took The Lead Last Week]

This reversal in mortgage rates was in fact driven by the sell-off in long-dated agency MBS, which many argued would not happen this quickly - yet here we are.

Source: Mortgage News Daily

[Related -Does Your Latest Investment Pass This Test?]

There are a number of reasons for the sell-off and the recent (mild) rise in the 30y conventional mortgage rates:

1. Dealers have built up a massive inventory of this paper, making it a bit more vulnerable to a correction.

2. Treasuries have sold off materially since early December (about 35bp yield increase on the 10y note), dragging MBS with them.

3. Some institutional investors are preparing for the Fed's eventual exit by unwinding their MBS holdings.

Reuters: - The PIMCO Total Return Fund, the world's largest bond fund run by Bill Gross, decreased its mortgage holdings to its lowest level since mid-2011, ahead of the prospect of higher interest rates and emerging inflationary pressures.
4. The Fed's purchases have been increasingly focused away from the 30yr FNMA, which they probably view as overpriced, and more on the GNMA and the shorter maturity FNMA (such as 15yr) bonds.
Source: JPMorgan ("Conv." stands for "conventional")

That's one of the reasons the 15yr mortgage rate has not moved up as much as the conventional 30yr.

Going forward, the direction of agency MBS paper is less clear, given the tremendous dependence on the Fed, who will be growing its balance sheet to unprecedented levels. The upcoming US sequestration cuts could in fact push treasuries higher (by slowing economic growth), with MBS following. On the other hand institutions will certainly become more cautious on their MBS holdings, given the increased rate risk.

iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageEmerging-Markets Stocks Took The Lead Last Week

Emerging-markets equities enjoyed a solid rise last week among the major asset classes, based on a set of read on...

article imageDoes Your Latest Investment Pass This Test?

On Wednesday, I sounded the alarm about the problems looming for some consumer staples stocks. In short, read on...

article imageIs The Slump In US Manufacturing Easing?

Yesterday’s November survey data from the Philadelphia Fed hints at the possibility that a stronger trend read on...

article imageMarket Potentially Facing Near Term Technical Headwinds

After the S&P 500 Index pullback on Thursday and Friday last week, the market's advance on Monday and read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.