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Wednesday, November 30, 2011

Federal Reserve buying $545 bn mortgage bonds

NEW YORK: The biggest bond dealers in the US say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.

Fed chairman Ben S Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another programme next quarter, 16 of the 21 primary dealers of US government securities that trade with the central bank said in a Bloomberg survey. The Fed may buy about $545 billion in homeloan debt.

While mortgage rates are already at about record lows, housing continues to constrain the economy, with the National Association of Realtors saying in Washington last week that the median price of US existing homes dropped 4.7% in October from a year ago. Borrowers with a 30-year conventional mortgage would save $40 billion to $50 billion annually in aggregate if they could all refinance into a new loan with a 3.75% rate, according to JPMorgan Chase & Co.

"We need to see a bottom in home prices," said Shyam Rajan, an interest-rate strategist in New York at Bank of America Corp., a primary dealer. "These are not numbers that are going to get down your unemployment rate," which has held at or above 9% every month except two since May 2009, he said.

The company forecasts the Fed will buy $800 billion of securities, which may include Treasuries. Efforts to bolster the economy are taking on new urgency with $1.2 trillion in automatic government spending cuts slated to begin in 2013.

The US commerce department said last week that GDP expanded at a 2% annual rate in the third quarter, less than the 2.5% it originally projected, and Europe's worsening debt crisis threatens to further curb global growth. The Fed is taking the view that "even if US fundamentals look to be relatively okay, we've got to keep our eye on any contagion from the European stresses," Dominic Konstam, head of interest-rate strategy at primary dealer Deutsche Bank, said. "It's in that context that they're willing to do more."

Treasuries rose last week on those concerns, with the 10- year yield falling five basis points, or 0.05%age point, to 1.97%, according to Bloomberg .

The rate rose six basis points to 2.03% on Mondayas of 8:52 a.m. in London. The 2% security due November 2021 fell 17/32, or $5.31 per $1,000 face amount, to 99 3/4. Policy makers have scope to print more money to buy bonds in a third round of quantitative easing, or QE, as the outlook for inflation eases.

A measure of traders' inflation expectations that the Fed uses to help determine monetary policy ended last week at 2.25%, down from this year's high 3.23% on August 1.

The so-called five-year, fiveyear forward break-even rate, which projects what the pace of consumer-price increases will be for the five-year period starting in 2016, is below the 2.83% average since August 2000. "There is a significant chance that QE3 will be deployed, especially in the form of MBS purchases, if inflation expectations fall enough," Srini Ramaswamy and other debt strategists at JPMorgan wrote in a Nov. 25 report.

The Economic Times

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