The announcement of the third round of quantitative easing, during which the Fed will buy $40bn of mortgage-backed securities per month until the outlook for the labour market improves ‘substantially’, initially led to a sharp drop in agency MBS yields. And that led, in turn, to a significant decline in 30-year mortgage rates during the final two weeks of September, to 3.5% from 3.7% previously. Mortgage applications rose in response, although applications for home purchase remain very low in a historical context. More recently, however, MBS yields have made up nearly all of their initial drop. If sustained, that suggests that mortgage rates may not fall much further, and could even rise.
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