Release The Taper

Despite the initial reaction to the jobs report. Some, like White House Chief of Staff Ron Klein, were trying to argue this was actually a good jobs report. However, it does not appear that it matters too much to The Fed as most analysis concurs that tapering will be happening right on schedule.

Nick Timiraos at The Wall Street Journal said that the anemic job growth and sub 5% unemployment rate appears to be enough “to keep the Fed on track to announce a taper after their Nov. 2-3 meeting.” (WSJ) Timiraos was not alone. Brian Chappata at Bloomberg also believes tapering is happening. “The Federal Reserve will almost certainly announce its plan to begin reducing its bond purchases next month. But the U.S. labor market definitely isn’t making it easy for it.” (Bloomberg).

Conventional wisdom says that tapering will lead to a jump in mortgage rates. However, Telis Demos at The Wall Street Journal says not so fast…(Wall Street Journal)

Demos explains that when it comes to mortgage rates the two major inputs that impact rates, outside of interest rates themselves, are “the yields on bonds that package up mortgages for investors, and the potential profit on selling mortgages into those bonds.”

  • Thanks to the Fed’s buying of mortgage bonds yields have been unusually close to Treasury yields. This means “that there is the potential for the spread to normalize, pushing up mortgage bond yields even faster than Treasury yields. This would in turn put upward pressure on mortgage rates as mortgages are sold into those vehicles.”
  • This seemingly inevitable could, however, be offset by lenders. Demos notes that “During much of the pandemic, mortgage originators have been highly profitable, earning unusually big margins on selling Fannie- or Freddie-eligible mortgages into the bond market.” Even though the spread has narrowed some it is still higher than it often was in the years preceding the pandemic. Leading people like Bose George, an analyst at KBW, to conclude that “At least for the next few quarters much of the impact of tapering is likely to be felt more by lenders than by borrowers,”

In these current times, it’s hard to know anything for certain. However, it does seem as if we have some idea of what could be coming next. The Fed is going to start tapering and the housing market will continue to remain relatively hot. Beyond that is anyone’s guess.