Mortgage Traders Play Down Need For Further Fed Aid
06 Januar 2010 - 10:57PM
Dow Jones News
Federal Reserve policy makers are keeping open the option to
prop up the mortgage market even after its $1.25 trillion mortgage
securities purchase program ends in March, documents released
Wednesday show, but traders played down the idea that such help
would be necessary.
The test is how the housing market, which is on a fragile
recovery path, weathers the loss of government support. Many
traders and portfolio managers actively support the government's
exit, since its wholesale purchases of mortgage-backed securities
has skewed their market projections and analyses.
There was little market reaction to the possibility that the Fed
may extend its mortgage program, as discussed in minutes of the
policy committee meeting that were made public Wednesday.
"We still expect the Fed to stop purchases in March, and [to]
reserve the right if needed to come back and purchase more," said
Ajay Rajadhyaksha, head of fixed-income research at Barclays
Capital.
As long as mortgage rates stay within 1.75 percentage points of
Treasury bond yields, there will be no panic, Rajadhyaksha added.
Mortgages are currently about 1.26 percentage points above
comparable Treasury yields, little changed on the day. The spread
peaked at 2.83 percentage points in March 2008.
Market participants estimate that rates on 30-year fixed loans
will rise to about 5.5%, from the current 5.05%, when the
government stops buying mortgages. Investors will demand a higher
return for taking on risks now shouldered by the Treasury.
If the market pushes mortgage rates close to 6%, however, then
there may be a need for the Fed to re-enter the market, as the Fed
policy makers discussed in December.
The minutes noted that "a few members observed that it might
become desirable at some point in the future" to extend the central
bank's large-scale asset purchases beyond the first quarter,
"especially if the outlook for economic growth were to weaken or if
mortgage market functioning were to deteriorate."
The concern was the "risk that improvements in the housing
sector might be undercut ... as the Federal Reserve's purchases of
MBS wind down, the homebuyer tax credits expire, and foreclosures
and distress sales continue."
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468;
prabha.natarajan@dowjones.com
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