A convex world

10 June 2013 By Agnes T. Crane

The U.S. central bank would like a graceful exit from quantitative easing. Investors in the $8.2 trln mortgage market will make that hard. Their hedges exaggerate movements in the Treasuries market, as seen in May’s yield spike. The pattern could be dangerously self-reinforcing.

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The U.S. Treasury 10-year yield rose as high as 2.24 percent in May, 0.6 percentage higher from where it traded at the end of the previous month. The benchmark note yielded 2.2 percent on June 10.
The effective duration, or life expectancy of a mortgage, has increased nearly three years, or by 224 percent, to 4.15 years since the Fed launched its latest bond buying program in September 2012, according to FTN Financial. At the end of April, nearly 82 percent of homeowners had an incentive to refinance their mortgage. In early June, only half did.
U.S. mortgage rates for a 30-year fixed loan were 3.90 percent in the week ending May 24, the highest level in a year, according to the Mortgage Bankers Association.
The Federal Reserve pledged to buy $40 billion of mortgage-backed securities per month in September and $45 billion of Treasuries per month in December 2012 until the outlook for the labor market improves and consumer prices remain stable.

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