How to weather today's Fed taper talk

by Ryan Smith18 Sep 2013

Top mortgage professionals counseled calm Tuesday as the Federal Reserve’s policy-making committee began a 2-day meeting to discuss whether to scale back its $85bn-per-month bond-buying program. 

Many investors expect Fed Chairman Ben Bernanke to scale back the program by a modest $10bn while keeping interest rates near zero, according to a Reuters report. Taper talk has been vexing the mortgage industry for weeks, with rates reaching new highs in August as investors speculated on the timing of the taper. 

The announcement of any taper, big or small, is going to hit the mortgage industry, said Bryan McNee, vice president and senior bond analyst for

“The Fed has a couple different options tomorrow,” McNee told MBA. “One is that they do nothing. If that’s the case, what you’ll see is mortgage-backed securities have a rally and mortgage rates will improve. Another option is they announce the taper as a small amount. The market will view that as the beginning of larger reduction. If they announce any form of taper whatsoever, the bond market will react negatively to it. 

“The market will view the taper like a snowball at the top of a hill: once you push that snowball down, it’s going to gather speed and get bigger and bigger,” McNee said. “Even though it might be a small dollar amount – say a $5 billion or $10 billion reduction – the bond market will react exponentially to that.”

If the Fed tapers at all, McNee said, further mortgage rate increases are inevitable.

“The market will be focused on which portion they’re tapering. If they leave Treasuries alone and just reduce mortgage-backed securities, mortgage-backed securities will sell off in a major way,” he said. “If they leave mortgage-backed securities alone and reduce their monthly Treasury purchases, there will still be a sell-off of mortgage-backed securities, because they feed off that 10-year Treasury note. No matter what they’re going to do, it will cause mortgage rates to increase from where they are right now. That’s not necessarily a bad thing. … Yes, it means higher rates, but that could be good if it means a true market equilibrium.“

J. Scott Harris, vice president of business development and recruiting at Gold Financial Services, told MPA he wasn’t too worried about further rate hikes in the event of a bigger-than-expected taper.

“I think (rates) have already jumped expecting it, so they’re already higher than they should be, just because. They may get an immediate reaction, but it’ll probably settle back down,” Harris said Tuesday.

“Just focus on what’s right from the business standpoint,” he said. “There’s still tons of people that need to buy. There’s still tons of people that missed the refi boom for one reason or the other. As this time passes, they’ll still be there and need to refinance – it’s just not going to be as low a rate as they could or should have had.”

Tuesday morning saw modest stock gains in anticipation of the taper news. The Dow Jones Industrial Average was up 52.92 points Tuesday morning, while the S&P 500 was up 5.75 points and the Nasdaq Composite showed a gain of 14.68 points.

A statement about the Fed’s taper decision is expected this afternoon after a press conference by Bernanke, Reuters reported.


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