Rates Rebound but for How Long

Friday, March 26, 2010... the last day the Fed is participating in its Mortgage Backed Securities purchasing program in which it has spent 1,250,000,000,000 dollars to keep interest rates artificially low. Over the last year and half or so, the MBS market has been subsidized by Federal government by the tune of 1,25 trillion dollars, today that program stops.

On Wednesday of this week we got a taste of what the market without the Fed may look like. Thursday we saw the market continue sliding until afternoon sessions when it rebounded despite the highest treasury yields we have seen in years. Today we have begun the day up 8 ticks. The question is, how active is the Fed right now and are these gains simply their final exit strategy or are private investors party to this upswing on a day typically reserved for profit taking and selling?

Personally I believe this jump in secondary can be attributed to the Fed injecting one last pool of funds into the MBS market. Due to it being Friday, a day when our market is typically less active than on other business days, the amount of money required to buy these gains is reduced and comes at a discount. If in fact the Fed is currently trying to make the market in its final day of investing, then today and today's gains really mean nothing in the grand scheme of things, and come Monday we will see a secondary sell off and these gains realized will disappear.

It is troubling to think that our market has been artificially supported by the Fed for so long now, that when the free market reacts to their leaving we will be forced to experience some type of correcting period. This could be a day, or take weeks, the point is MBS has not been a truly free market for some time. It has been under the watchful eye of the Fed, the same people that print our money. Of course they can afford to buy... all it costs them is ink and cotton. The real investors however do not have an indefinite slush fund and cannot print their own money when the coffers run out. It will be a very interesting transition.

It is my opinion that rates will not hold at their current levels, and what we saw Wednesday will happen again. If you missed Wednesday, the seconday market fell a full 26 ticks bringing interest rates up to their highest levels of the year. Expect more of this moving into Spring and Summer.

Home loan rates have come down temporarily... if you are in a position to lock, lock. If you have been on the fence looking for a reason to move on financing, now is that time. With the Fed leaving rates will rise, and everyone should get into one of these low rates if at all possible.

Consider these better rates a very short term occurance. I expect these gains to dissolve by Tuesday at the latest.