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No Changes in FOMC Accommodative Stance of Monetary Policy

The Federal Open Market Committee (FOMC) wrapped up their two day meeting yesterday and released a statement showing no changes in current monetary policy. The FOMC will continue to keep the fed funds rate near zero percent, buy $40 billion a month in agency mortgage-backed securities and $45 billion a month in long term Treasuries.

The FOMC's polices were designed to put downward pressure on long term interest rates and mortgage rates. Despite the Fed's polices, interest rates on long term Treasuries and mortgage rates have risen considerably over the past two months. Both were driven higher because markets were afraid the Fed will announce an end to their purchases.

No Changes in FOMC Accommodative Stance of Monetary PolicyEven though the Fed announced in the statement that they would continue to buy MBS and Treasuries, interest rates are still rising. 10 year Treasury yields closed last Friday at 2.14 percent. Right after the FOMC's statement was released on June 19, 10 year yields spiked but settled down and closed at 2.20 percent, 1 basis points higher than the day before.

10 Year Bond Yields Move Sharply Higher Today

As of June 20 at 1:30 PM 10 year yields are rising sharply again. The current 10 year yield is at 2.43 percent, up 13 basis points from yesterday's closing. Although treasury yields have starting moving higher, fixed long term mortgage interest rates have fallen for the first time in seven weeks but the declines are only temporary.

In this in this week's Primary Mortgage Market Survey, released by Freddie Mac, average 30 year mortgage rates declined to 3.93 percent, down from last week's average of 3.98 percent. Average 15 year rates declined to 3.04 percent, down from last week's average of 3.10 percent.

Future Short Term Direction of Mortgage Rates

The decline in average mortgage rates will be short lived since mortgage rates are tied to 10 year U.S. Treasury yields. When yields move higher on Treasuries, mortgage rates also move higher. With current 10 year yields closing in at 2.50 percent we could see 30 year mortgage rates increase to 4.25 percent sometime this weekend. 15 year rates could move as high as 3.25 percent.

Bond yields and mortgage rates are moving higher but the same can't be said for deposit rates. Until the FOMC increases the Fed funds rate, deposit rates will remain low. Right now the best 12 month CD rates in our rate database are at 1.04 percent with an APY of 1.05 percent. The best savings rates are at 0.90 percent and the best money market rates are at 0.89 percent.

Equity Markets Tumble as Bond Yields Soar

Higher bond yields and the possibility of the end ending their purchases is causing the equity markets to tumble right now. All three major indices are down almost 2 percent. The Dow is down over 225 points, the S&P 500 is down 28 points and the NASDAQ is down almost 60 points. I believe the markets are reading to much into the FOMC's policy statement, the purchases will end one day but not anytime soon.

We will continue to see a spike in long term rates but the higher rates move up the longer the Fed will continue to by these assets. In the Fed's statement they said:
"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall"

The economy is looking better than last fall but by no means is on a tear that would cause long term interest rates to spike as much as they have. The higher the markets send rates, the longer the Fed will continue to buy these assets to force rates lower. As the saying goes, "you can't fight the Fed", so come this time next month long term rates will be lower than current levels.
Author: Brian McKay
June 20th, 2013