The US mortgage market shows signs of weakness, the Fed's balance sheet is prepared to cut

At the end of August, a regular meeting of central bankers will be held in the United States, which have the name of the symposium in Jackson Hole. It´s expected that Mario Draghi announce plans to reduce QE, but after the last panic sale of shares and the growth of the Euro, Mario Draghi could surprise and re-engage dovish attitude.

The market will also be sensitive to information from Fed Governor Janet Yellen. In July, she engage slightly dovish attitude, and the last FOMC meeting was accepted in a same way. In September, the Fed should announce the start of bond sales from its balance sheet, bought during three rounds of quantitative easing. It will sell government bonds, but also mortgage backed securities. From the beginning, their total volume should be of 10 billion USD per month, and after that it should be increased to $ 50 billion USD per month. Revenues of government bonds have so far failed to respond to these reports and are continuing to decline, mainly due to the geopolitical crisis between the US and North Korea.

Mortgage backed securities, are starting to show signs of weakness for the first time since 2011. Current MBS yields are up 0.3% than government bonds, suggesting a slight nervousness about MBS papers. According to analysts, revenues on government bonds, as well as MBS, will have to increase significantly, to be a sufficient interest of them and the Fed can sell it on the market.

More than a quarter of the total balance of the Fed, in the volume of almost 7 trillion USD, is formed of mortgage-backed securities. The central bank, however, holds up to 18% of the total volume of government bonds, and therefore the pace of sales should be slow to avoid panic and a intense rise in yields, which could endanger financial stability.

Mortgage rates also rose together with rising yields on mortgage papers, mainly due to rising US rates. The 30-year mortgage rate is currently around 3.90% versus 3.30% five years ago. 30-year government bonds have a yield of around 2.80%. Low mortgage rates support the US real estate sector and the construction / purchase of new houses. The real estate sector could be more strongly affected by the rise of interest rates. But if the sale of MBS is very slow and the Fed will only gradually raise rates, it wouldn’t have to cause any more cooling on the real estate market.

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