So far in 2017 several articles have been issued by Bloomberg News calling direct attention to long-term rate increases anticipated to occur over the next 12-18 months.
The following represent short summaries of the below three articles for your reference.
Yellen Set High Hurdle for Reducing Fed’s Bond Holdings
- Fed’s near-term focus is on raising interest rates to keep the economy in balance, only then will the central bank begin to shrink its $4.5 trillion balance sheet.
- More than $600 billion of treasury securities held by the Fed are scheduled to mature in 2017 and 2018.
- The Fed’s priority is to rebuild its future tools (raise interest rates) to enable it to address future weakness by cutting rates.
- Policymakers expect to increase fed funds rate to 1.4% by EOY 2017
Fed Debates Over $4.5 Trillion Balance Sheet Looms in 2017
- Over the past eight years the Fed began purchasing what now totals $4.5 trillion of bonds (treasury, RMBS, CMBS) to hold down long-term U.S. borrowing costs.
- If the Fed were to reverse this policy and sell-off the countries bond holdings, this would reduce demand and almost certainly increase long-term borrowing rates.
- The Fed has increased short-term rates twice in the last 13 months and targets three quarter-point moves in 2017.
- Right now, the Fed’s position is to maintain the balance sheet by reinvesting principal repayments until its rate-hike cycle is “well underway”.
The Mortgage Bond Whale That Everyone is Suddenly Worried About
- Fed Balance Sheet currently holds $1.75 trillion of mortgage backed securities holding one-third of the total market. Any move is likely to increase costs for the home buyers.
- According to Moody’s Analytics Inc., getting out of the bond buying business could boost the 30-year mortgage rates (currently 4.32%) past 6.00% within three years.
- When the biggest buyer leaves the market, there will naturally be less demand for Mortgage Backed Securities. Goldman Sachs forecasts this to begin in 2018.
- Finding buyers to replace this demand such as foreign central banks and commercial banks will likely require wider spreads (higher rates).
Long term, fixed rate financing is still readily available for most properties at today's low interest rates.