October 24, 2009

Tracking The Bond Markets for Direction

Bill Gross, who runs the Pimco Bond Fund is considered one of the gurus of the bond markets. Investors know this and so the Pimco Bond Fund is huge. If Pimco buys or sells bonds or mortgage backed securities, it can move the market.

Recently, Gross sold off 30 billion dollars of mortgage backed securities. He notes that mortgage backed securities have been increasing in value (good to hear) and he thinks that now is the time to take profit. *Chart: The Fed has now purchased about $945 billion in agency-backed MBS through the week ended October 14.

Federal Reserve's Mortgage Purchase Program

The secondary mortgage markets have been frozen and thats a big reason why there has been little money available for home loans. To keep the markets moving the Obama Administration has been buying up mortgages to keep the markets liquid.

The Fed started buying agency-backed mortgages in January in to bring down mortgage rates. Since then, it has bought the majority of agency MBS on the market. Recently the Fed has decided to wind down the mortgage purchase programs.Once the Fed stops buying mortgages, the fall in demand will lead to a drop in MBS prices.

Why Do We Care
Expect interest and mortgage rates to rise.

Too much supply and not enough demand means prices go down, and yields had to go up to attract investors. Basically, this is a test to see if the banks and the marketplace have reached a point where they can begin to function without Govt stimulus. Lets hope the Fed stays close to the exits.

The Home Buyers tax credit is due to expire. Congress is considering extending and possibly expanding this program. Its been a help by soaking up supply..

Home resales in September showed the largest monthly increase in 26 years as buyers bought before the tax credit for first-time owners expires. Sales jumped 9.4%, according to NAR.

The FHAA index measures repeat sales on homes financed through Fannie Mae or Freddie Mac. Although Prices were down 3.6% in the past year, and were down 10.7% from the peak, they rose in four of nine regions, fell in four and were flat in the other

If we can offset the higher rates which are likely to tamp down sales with a $15,000 home buyers tax credit, we may be able to keep homes moving. At 20% of the economy, its crucial that the real estate markets remain on a positive track.

Thanks for Reading

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