It’s interesting to note that mortgage rates have actually moved higher since QE3 began. That’s not surprising since the economic data appears to have improved and the risk on rally has continued, but Sober Look has some more thoughts on the rise in rates:
There are a number of reasons for the sell-off and the recent (mild) rise in the 30y conventional mortgage rates:
1. Dealers have built up a massive inventory of this paper, making it a bit more vulnerable to a correction.
2. Treasuries have sold off materially since early December (about 35bp yield increase on the 10y note), dragging MBS with them.
3. Some institutional investors are preparing for the Fed’s eventual exit by unwinding their MBS holdings.
Reuters: – The PIMCO Total Return Fund, the world’s largest bond fund run by Bill Gross, decreased its mortgage holdings to its lowest level since mid-2011, ahead of the prospect of higher interest rates and emerging inflationary pressures.
4. The Fed’s purchases have been increasingly focused away from the 30yr FNMA, which they probably view as overpriced, and more on the GNMA and the shorter maturity FNMA (such as 15yr) bonds.