Inflation and the Fed Meeting were the big issues last week.  The Producer Price Index came out way above expectations which fueled inflation fears.  These fears were eased when the Consumer Price Index numbers were in line with what economists thought.  When the Fed adjourned their meeting Wednesday they stated they wanted to keep rates low “for a long time” but did warn that they would cease buying mortgage backed securities at the end of the first quarter of next year.  The Fed is currently the largest purchaser of mortgage bonds.  To extend the $1.25 Trillion they pledged to buy, they reduced the amount of weekly purchases from $25 billion to roughly $16 billion.  That means there has been $9 billion less per week to lend.  I’ve noticed that credit standards have continued to tighten, especially since this reduction in Fed weekly purchases.  Who will buy mortgage backed securities when the Fed purchase is done?  A lot of it will be the foreign investors currently buying the record amount of Treasury Securities our government has been selling to finance the recovery.  Both types of securities have traditionally been thought of as quality investments although we all know the story of how the quality of mortgage bonds declined over the past few years.  I can assure you now though, that the mortgages that back those bonds now are of the highest quality I’ve seen in the past 23 years!

It’s Christmas week and amazing ly we still have some pretty important economic reports.  The 3^rd quarter GDP figure comes out tomorrow along with existing home sales.  Wednesday we get Personal Income, PCE Price Index (another inflation number), Consumer Sentiment and New Home Sales.  Durable Goods orders come out on Thursday.  Holiday weeks have thin trading conditions and can be quite volatile and mortgage bonds are off already today.  I gave this same warning Thanksgiving week and mortgage bonds actually improved so who knows?!?!?

Patt Wynn

Bradford Mortgage Group