Treasury Massacre

May 29, 2009
Matt Isleib

 

Quick brush up for the “classroom” on mortgage rates, they are tied to two indices, the ten year treasury market and MBS (mortgage backed securities). This week has been the week that traders, mortgage bankers, mortgage brokers, the government, the fed, the borrower, should I keep going, would like to forget. The treasury and MBS market got slammed and hard.

The fed had pledged $1.2 trillion to buy treasury securities and mortgage backed debt. The fed stepped into the ring with the plan of buying these assets to help keep mortgage rates in the fours and help the slumping economy and real estate markets. In an analogy of a python snake and a lab mouse, the fed was the lab mouse and the rest of the market was the python. Fill the rest of the picture in how you like, in the end the mouse hung in there for a few but the apparently obvious outcome unfolded. Let’s just say Bernanke and the fed have officially lost the battle.

All of several trading days were all that it took for nearly six months of decreasing rates. It seems as though mortgage rates in the fours for now are a thing of the past. The fed has learned the hard way that they cannot control the market.

At this point though it is too early to try and gauge the next direction. The heavy selling of treasuries and mortgage backed securities that pushed mortgage rates up nearly ¾’s of a percent in a matter of days was also fueled by fear as well as rumor that the fed may lose their triple A rating. When the dust settles in the next day or so the picture will be clearer. Besides the common theme for the fed is “if it doesn’t work then throw more money at it” so that has yet to be played out. Rest assured the fed is watching closely and this may be the time that “throwing” more money may not be the right call, besides the government cannot just print money forever. In the meantime borrowers may need to get accustomed to mortgage rates in the 5’s and not the 4’s for a while.