Mortgage Rates Move Higher After Fed Tapering Announcement

Mortgage Rates moved higher today after the Federal Reserve announced the first reduction in its purchases of Treasuries and MBS. The reduction in Treasuries hurts mortgage rates indirectly and the reduction in MBS ("mortgage-backed-securities") hurt rates directly as these are the securities that mortgages ultimately turn into.

This is a big deal and it has a big effect on the interest rate landscape. But there is good news, or at least a silver lining. The negative effects on today's rate sheets are far less severe than they might have been. Part of the reason may have to do with how the Fed delivered the message. While they are tapering asset purchases, they also noted that the Fed Funds rate would remain low well past the time that unemployment hit 6.5% (their initial threshold for considering raising short term rates).

While short term rates don't have as much of an effect on mortgage rates as the asset purchases, they do help indirectly by keeping funding costs low for banks making loans. This helped the bond market (of which MBS are a part) avoid more abject damage from the news.

In addition, bond markets have simply been coming to terms with this eventuality for weeks and months--all the way back to May 2013. Especially in the month of November, and again after the December 6th report on Employment, interest rates did a lot to get into position for this potential Tapering announcement, and thus avoided a sharper spike when it actually came.

Almost miraculously, 4.625% remains the most prevalently quoted rate for ideal, conforming 30yr Fixed scenarios.

In summary, the slow, but steady improvement in the labor market and economy was enough to justify a decision to start a reduction in the MBS and TSY purchases by the Fed. The reduction in each was small enough that it helped prevent a large sell off many expected on an announcement of any "tapering." Maybe this gives some direction and a relative timetable to investor that were curious about how and at what pace they would do this? All in all the recent 2.8-2.9 range on the 10 year is still in play and the longer term 2.75-3.0 is very contained at this point. The trend is still not the rate shoppers’ friend and I recommend locking any small bounce back or improvements in pricing you see in the short term.

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