Mortgage interest rates are rising. If they continue to do so, then the Federal Reserve will probably become pretty frustrated. Today it reaffirmed its latest round of quantitative easing, explicitly designed to keep down longer-term interest rates, like those for mortgages. So what's going wrong? Apparently mortgage bonds aren't selling so well right now. Less demand is leading to higher yields. Perhaps the Fed should consider buying some of these securities too.
Here's the problem, via Jody Shenn at Bloomberg:
Yields on Fannie Mae-guaranteed securities that most affect loan rates jumped to 4.22 percent as of 11:28 a.m. in New York, an increase of more than 1 percentage point from an all-time low in October, according to data compiled by Bloomberg.
Higher loan rates "won't be fun" for a fragile housing market, said Scott Simon, head of mortgage bonds at Newport Beach, California-based Pacific Investment Management Co., manager of the world's biggest bond fund. "If you were looking at buying a house a few weeks ago, the same house, to you, looks as much as 9 percent more expensive," he said.
As a part of the Fed's financial crisis intervention, the central bank purchased $1.25 trillion in mortgage securities through March 2010. But as the Fed noted earlier this year, those securities in holds are paying off more quickly than anticipated, as very low interest rates had helped to create a mini-boom for refinancing. As a result, the Fed's balance sheet was shrinking faster than it wanted, which prompted it to begin buying additional assets in August to keep its size level. But it chose to replace those mortgage bonds with longer-term Treasuries. Of course, the Fed's additional $600 billion quantitative easing was announced a few months later. It also focused on longer-term Treasury purchases, however.