By The Numbers - Monday, March 1, 2010

Any school kid knows the old saying...that March comes in like a lion and goes out lke a lamb. But since this is the last month of the Fed's Mortgage Backed Security purchase program, interest rates in March could very well come in like a lamb and go out like a lion.

There has been considerable jawboning abut how there will be no negative reaction for interest rates when the Fed bying stops. This "whistling past the graveyard" just doesn't make sense to me, and I feel strongly that rates will move higher - albeit the move higher will be gradual, but rates will be adversely affected in the absence of the Fed purchasing. And I also hear the question, "Do you think rates will go higher once the Fed stops purchasing?" The answer is ..they already have. Rates are .25 to .375% above where they were just a few months ago.

In fact, rather than being a buyer of Mortgage Backed Securities, the Fed said at the last Fed Meeting on Jan 27th that they will in fact gradually become a seller of MB and other government debt, in order to trim their balance sheet. At the moment, the Fed has $777B in Tresuries, $166B in agency debt and will have a whopping $1.25T total in Mortgage Bonds on their books. When you consider this enormous supply of paper that will be unloaded over time, in conjunction with the new Treasury supply coming to market every two weeks - there is only one way to attract buyers to purchase this massive government debt supply...and that is by offering higher rates. Bottom line - if you still hoping for lower rates, you may be running out of time. Now is the ideal time to "get off the fence," and make a decision.

There are also a couple of other factors that have been helping rates which will eventually come to and end. The Carry Trade, will unwind once the Fed begins to tighten - and chances are high that the tightening will begin later this year. Bonds have also been greatly helped by a flight to quality, over fears of a Greek sovereign debt default. I feel strongly there will be a Greek bailout and once announced, the safe haven trade will reverse, which should push Bond prices lower and interest rates higher.

For now-as we begin this first week of March, Mortgage Bonds are trading in lamb-like fashion, presently near unchanged levels, thanks to some tame consumer inflation data. The January Core Personal Consumption Index, PCE, which measures consumer inflation, came in at 0.0% matching expections. This left the year-over-year Core PCE rate at a modest 1.4%, and at the moment, well within the Fed's comfort zone.

If you are a Realtor and have people waiting on lower rates, have them read this blog or give me a call at 601.977.6228.