Bloomberg News

Fed’s Bond-Buying Talk Already Working, Scott Says: Tom Keene

February 17, 2012

Feb. 16 (Bloomberg) -- Federal Reserve officials’ suggestions that the U.S. central bank may buy more mortgage bonds are already driving up prices and lowering borrowing costs, potentially reducing the impact of any actual program, Bank of America Corp.’s Brad Scott said.

“The market has given the Fed the optimal outcome without the Fed having to do anything,” Scott, the bank’s New York- based head trader for pass-through agency mortgage securities, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “It may be buy the rumor, sell the fact. We’ve had that multiple times through the Fed’s involvement in our market.”

Fed officials including Chairman Ben S. Bernanke have said the central bank may start a third round of bond purchases, potentially targeting mortgage debt. The buying would seek to stimulate the economy with lower lending rates after three years of unemployment above 8 percent and the worst U.S. housing slump since the Great Depression.

The average rate on a typical 30-year fixed-rate mortgage fell to a record low 3.87 percent in the week ended today, down from 4.55 percent about six months ago, according to Freddie Mac surveys. Higher rates would represent the “most pain” for the Fed and may be the “path of least resistance,” Scott said.

A few members of the Federal Open Market Committee said last month at their Jan. 24-25 meeting that the central bank may soon have to consider more asset purchases, while others said the economic outlook would have to deteriorate first, according to minutes of the gathering released yesterday.

‘On the Table’

Mortgage-bond investors are pricing in about 40 percent odds of further bond buying by the Fed, Credit Suisse Group AG analysts led by Mahesh Swaminathan said today in a report. Prices of Fannie Mae-guaranteed 3.5 percent securities, which have risen 2.2 percent over the past six months to about 103.5 cents on the dollar, may drop by about 0.5 cent if a program isn’t announced, a potential outcome the analysts characterized as “contained.”

The FOMC minutes “underscore” that the possibility “remains on the table” despite investor concerns that it had lessened after economic data that topped economist estimates, the analysts said. Bernanke told lawmakers last week that the declining U.S. unemployment rate, which is down to a three-year low of 8.3 percent, fails to reflect challenges in the job market as people leave the labor force.

Previous Purchases

The Fed previously bought $1.25 trillion of government- backed mortgage securities from January 2009 through March 2010 and began reinvesting proceeds from its past purchases of housing debt in the market in October. By keeping short-term interest rates near zero, the Fed also has fueled buying by U.S. banks, whose holdings last month reached a record $1.27 trillion.

The central bank’s success in pushing down borrowing costs will lead to more refinancing in the coming months as homeowners with debt backed by Fannie Mae and Freddie Mac take advantage of a loosening of rules by the government-supported companies, Scott said.

--Editors: Shannon D. Harrington, John Parry

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net Thomas R. Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus