If members of the Federal Reserve’s Open Market Committee wind up a two-day meeting Wednesday by announcing that the Fed will begin tapering its $85 billion-a-month purchases of Treasurys and mortgage-backed securities, the news could add to the momentum behind rising mortgage rates.

Bond prices and yields move in opposite directions, and as the Fed’s appetite for such investments diminishes, the balance of supply and demand could get out of whack. That would undermine bond prices and push up yields.

Not only do mortgage rates tend to follow broad trends in 10-year Treasury yields, but the Fed’s “quantitative easing” includes $40 billion a month in MBS purchases. Take the Fed out of the demand side of the equation for MBS issued by Fannie Mae and Freddie Mac, and homebuyers can probably expect to pay higher rates on home loans.

A lot depends on whether tapering is already priced in to bond and MBS markets. The Fed likes to telegraph its moves well in advance, and long-term interest rates are already up more than 1 percent since central bank officials started “jawboning” about tapering in May.

But many analysts aren’t expecting the Fed to start tapering until March or April. Any Fed action before that may not yet be priced in. PIMCO CEO Mohamed El-Erian puts the odds of a taper announcement tomorrow at 50 to 60 percent.

“By January, it increases tremendously, and by March it’s almost a done deal,” El-Erian said today on Bloomberg TV.

Whenever tapering is announced, there’s no predicting exactly what rates will do. As mortgage broker and Inman News columnist Lou Barnes says, “Trying to get inside the head of the bond market will make you crazy.”

But it’s still wise not to turn your back on it. Source: marketwatch.com

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