Fed not ready to kick $13.3B-a-week mortgage habit

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What does the Federal Reserve’s third round of quantitative easing (“QE3”), launched last fall, mean for mortgage markets?

Well, in just the last week alone, the Fed bought up $13.3 billion in agency mortgage-backed securities. That’s nothing unusual — the Fed’s target is to buy up $40 billion in MBS a month, and to keep up that pace it purchased $16.9 billion the week before that, Reuters reports.

The Fed’s purchases provide price support for MBS, which fund about 90 percent of U.S. mortgages. Since bond prices and yields move in opposite directions, the result is lower mortgage rates. But when the time comes to wind down QE3, MBS investors don’t want to be left holding the bag.

Mortgage rates began to climb in May after the Fed signaled that if the economy keeps improving, it was prepared to start tapering QE3, which also includes $45 billion in monthly purchases of long-term Treasurys.

Fed Chairman Ben Bernanke’s comments Wednesday that he thinks “a highly accommodative policy is needed for the foreseeable future” has investors thinking QE3 may have a longer life expectancy than thought. That provided support for MBS — relieving pressure on mortgage rates — and sent stock prices soaring today.

But it’s only a question of when, not if, QE3 will be throttled back and then shut down. Source: reuters.com.