Probably the most important development in the financial markets over the past week is the decline that has occurred in mortgage rates. The decline was prompted by the Federal Reserve's announcement that it would purchase $600 billion of agency and agency securities and agency mortgage-backed securities. The announcement brought 30-year mortgage rates down to as low as 5.60% compared to 6.04% two weeks ago. The move was spurred by a big rally in both agency securities and MBS.
Today, these securities have rallied further, and the yield on Fannie Mae's and Freddie Mac's 10-year debt securities has fallen a few basis points, and Fannie's current-coupon 30-year mortgage-backed security, which correlates strongly with consumer rates, is trading 15 basis points lower on the day. Mortgage rates have already moved into territory that would be expected to prompt a significant increase in mortgage refinancing activity, and movement toward 5.40% would prompt an additional surge, given that it tends to take about 50 basis points of incentive to compel a homeowner to consider a mortgage refi and many mortgages were dealt at 6% and slightly over.
The drop in mortgage rates is significant in and of itself because of what it means for the housing dilemma, but it is also important because it indicates investors have moved one layer out the risk spectrum.
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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