fed might extend MBS purchases

Since November of 2008, rates moved from the high six percent range down to the levels we’re seeing today.  We’ve been in the high four to low five percent range (give or take) for over a year now.  One of the main reasons we’ve been in the ultra-low rate environment for such a long time is due to the Federal Reserve Board’s commitment to buy mortgage-backed securities.  These regular purchases keep the demand for mortgage bonds higher than they would normally be, keeping rates in check.

But when the Fed announced they would begin such purchases they at the same time announced when they would stop.  That date is March 30, 2010.  You can expect rates to begin to rise around that time when mortgage bonds have to lower their price to offer an attractive yield.  That = higher mortgage rates.

Recently however, there have been more than rumors that the program would be extended although no one would come out and admit it.  When the Fed released their most recent meeting minutes it showed that more than a few of the Board Members were in favor of extending the purchase program.  On the other hand, there were still a few more that were against it.

Today, Bernanke didn’t rule out extending the program but he didn’t quash the rumor, either.  Instead he simply said that the Fed would wait until the end of the program before deciding to extend it.

My guess is that the Fed won’t make any announcements anytime soon but will make an announcement at say, March 29th that the Fed will extend the program but by only two more quarters.

That’s my bet.  Any takers?


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