Yesterday mortgage backed securities, the investment instrument that sets mortgage rates, managed to squeeze out a slight gain.  We have been treading sideways for some time, so it was nice to see a positive day.  We managed to close higher by about .25 in discount and so far this morning we are holding onto those gains.  I suspect we should see slightly better rate sheets this morning with 30 year fixed conforming interest rates anywhere from 4.5% with the most aggressive lenders to 5%.

Today we get the release of no economic reports; however, the Federal Reserve ends their 2 day meeting today and will release a statement at 2:15pm est.  The Federal Reserve will not be cutting the fed fund rate today since it is already at 0 to .25%, but the statement they release will be very important.  Worst case would be for the fed to talk about inflation being a concern and pull back of the mbs purchase program, but that will not happen.  For one, inflation right now is of no concern, deflation is, and the Fed wants lower mortgage rates so pulling back on the mbs purchase program would be shooting themselves in the foot.  I suspect that they will continue to speak of their intention to support lower rates by continuing the purchasing of mortgage backed securities.   If you remember, the Federal Reserve announced last year that they will spend up to $500b on the purchase of mbs and the actual buying started this month.  Currently, the Fed has spent $53b of the $500b and they announce every Thursday the purchases they have made for the prior week.  There is some speculation that the Fed may announce a Government Debt Purchase program where they would buy longer term treasuries in a way to support lower mortgage rates.   If you have been a reader, you know that mortgage rates do not follow treasuries, so why would the Fed buy treasuries to lower mortgage rates?  Well, if the Fed starts to buy treasuries in large amounts what will that do?  Well, for one, it will drive the price of treasuries higher which lowers the yield(rate of return they pay).  As the price of treasuries move higher, the rate of return they pay will be less which will make mbs more attractive to investors for their cheaper price and higher yields.  The Fed needs others to buy mbs to keep mortgage rates low.  There is also some speculation that they may announce the creation of a “Bad Bank” to buy all the toxic assets off banks balance sheets.  This would help lenders free up money and get it flowing through the credit system.  

On days when we get a Fed statement, the trading is very light so I suspect that mbs will move sideways until the announcement hits the wires.

If any surprises come today, I will definitely get back to you.