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UPDATE 1-U.S. mortgage bonds rise as Fed stays quiet on paring purchases
July 31, 2013 / 7:47 PM / 4 years ago

UPDATE 1-U.S. mortgage bonds rise as Fed stays quiet on paring purchases

4 Min Read

By Richard Leong

NEW YORK, July 31 (Reuters) - 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 said.

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 improvement.

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 unemployment.

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 Memphis, Tennessee.

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 late Tuesday.

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.

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