03/16/2020
UPDATE REGARDING FED RESERVE ACTION: Earlier today the Federal Reserve took action for the second time this month, lowering the target range for the federal funds rate by 100 basis points to 0 to 1/4 percent in response to the disruption to economic activity from the coronavirus - a move that was widely expected. The FOMC also announced an asset purchase program that would include $500B of US Treasuries and $200B of Agency Mortgage-Backed Securities. A statement from the New York Fed noted that Treasury purchases will begin with $40bn on Monday, March 16, while MBS purchases will total roughly $80bn over the period March 16-April 13, of which $23bn consists of reinvestment. Current daily production from mortgage lenders has averaged about $16B per day in the month of March.
Initial reactions indicate investors were more alarmed than calmed by the Fed move, fearing the coronavirus outbreak is worse than we are being told. US stock futures are tumbling in overseas trading, wiping out nearly half of the furious last-hour gains we saw on Friday after President Trump's emergency press conference where he declared a National Emergency. Treasury futures reflect the 'risk off' tone as well; 10yr treasury futures are currently up nearly 2points, indicating a yield of .80% (down 15bps).
Now to mortgages.... Right now, its very difficult for me to advise you on where mortgage rates shake out when the markets open tomorrow morning. Yes, banks can borrow at cheaper levels. Yes, US Treasury yields are lower. But the problems plaguing the mortgage market as of late have had very little to do with real interest rates (the Fed Funds rate) and more to do with lack of liquidity in the MBS market. Simply put, MBS investors have been overwhelmed with lender production since the first emergency rate cut two weeks ago. Certainly, the new MBS asset purchase program is a step in the right direction. Unfortunately, most investment banks have their trading desks working from home tomorrow, so getting bids and offers on MBS will be very difficult.
I expect MBS to tighten up somewhat, but I WOULDN'T jump to the conclusion that rates are heading back to last week's lows immediately. We trade with a couple of Japanese investment banks, so I should have a clearer picture on the MBS market later tonight when Japan and Hong Kong are trading. -
CREDIT Jeremy Collett
Executive Director, Capital Markets @ Guaranteed Rate
