By Richard Leong
NEW YORK, July 31 The U.S. mortgage bond market
rebounded from earlier losses on Wednesday after the Federal
Reserve offered no hint it would scale back its bond purchases
as it cited the risk of stubbornly low inflation to the economy.
The rise in prices of mortgage-backed securities should help
keep a lid on mortgage rates, after a recent jump raised fears
that higher rates would hurt the housing recovery, analysts
Wall Street economists had widely hoped the U.S. central
bank might offer more details on its plan to scale back its
bond-purchase stimulus as the economy showed further
Some investors and analysts reckoned the Fed's refrain from
divulging more on paring stimulus was aimed at stabilizing
mortgage rates and other long-term borrowing costs, which spiked
after Fed Chairman Ben Bernanke signaled the Fed might do so in
testimony on May 22.
Some recent data suggested higher rates have begun to affect
home sales and prices.
"Clearly they are ready to taper, but they don't want to see
tighter financial conditions. They want to temper that," said
Garth Friesen, co-chief investment officer at III Associates, a
hedge fund based in Boca Raton, Florida.
The U.S. central bank has been buying $40 billion in
mortgage-backed securities a month along with $45 billion in
U.S. Treasuries as the pillar of its third bout of quantitative
easing, or QE3, in a bid to stimulate the economy and lower
While the Fed acknowledged ongoing economic improvement, it
raised concerns about risk of low inflation; the Fed has a 2
percent target for inflation.
"Inflation is well below the Fed's target and could be
detrimental to the economy. This could change when and how
quickly the Fed would reduce its bond purchases," said Craig
Dismuke, chief economic strategist with Vining Sparks in
Even so, Dismuke and Friesen said the latest Fed statement
was not a game-changer. The Fed has not ruled out the
possibility it might pare bond purchases later this year.
"The Committee is prepared to increase or reduce the pace of
its purchases to maintain appropriate policy accommodation as
the outlook for the labor market or inflation changes," the
Federal Open Market Committee, the central bank's policy-setting
group, said in the statement after its two-day meeting.
On the open market, 30-year 3.5-percent coupon MBS supported
by loans guaranteed by Fannie Mae were 8/32 higher
in price with a yield of 3.25 percent, down 7 basis points from
Prior to the Fed statement, the same issue was 9/32 lower in
price with a yield at about 3.40 percent.
The Fed's perceived market-friendly statement also spurred
buying in other types of bonds.
Benchmark 10-year Treasury notes were up 6/32 in
price with a yield of 2.58 percent, down 2 basis points from
late on Tuesday.
Earlier Wednesday, the Mortgage Bankers Association said
interest rates on 30-year fixed-rate mortgages averaged 4.58
percent last week, unchanged from the prior week and after
hitting a two-year high in early July.