U.S. sovereign and mortgage bonds have fallen 0.9% in August as of Tuesday, according to Bank of America Merrill Lynch indexes. While both declined in May, June and July, Treasuries dropped more each time. Thirty-year fixed mortgage rates rose to 4.59% this week, approaching the highest level since May 2011, according to Bankrate.com. The Fed is scheduled to issue the minutes of its most recent meeting Wednesday.
“The market consensus is that tapering will kick in in September, and I can’t see any strong argument against that,” said Hajime Nagata, who helps oversee the equivalent of $120.3 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co. “Prospects the Fed will cut bond purchases have resulted in the sluggish MBS performance.”
Treasuries have fallen 3.6% this year, set for the steepest loss since 2009, Bank of America figures show. Mortgage-backed securities have dropped 2.9%, poised for the biggest slide based on indexes that go back to 1976.
Mortgage securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae are tumbling as the Fed considers how to pare its debt purchases.
U.S. commercial banks reduced their holdings of so-called agency mortgage backed securities by $16.6 billion in July, the most based on Fed data that go back to 2009. Banks owned $1.33 trillion of the securities as of Aug. 7, the smallest amount since November.
The Fed is currently buying $45 billion of Treasuries and $40 billion of mortgage-backed securities each month. Policy makers will probably vote at their Sept. 17-18 meeting to reduce the program, according to 65% of economists surveyed by Bloomberg Aug. 9-13.
The first step may be to reduce purchases of each set of securities by $5 billion, bringing the monthly total down to $75 billion pace, according to the survey.
U.S. government securities rose Tuesday for the first time in four days on speculation a withdrawal of Fed stimulus will hurt weakening emerging economies, stoking demand for the relative safety of government debt.
Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 95.7 basis points Tuesday. The average for 2013 is 68.32.
Fed Chairman Ben Bernanke said last year the central bank’s purchases of mortgage debt should help the housing market, which he called “one of the missing pistons in the engine.” The policy aimed to put downward pressure on home-loan rates and create demand for houses, he said.
Thirty-year mortgage average costs climbed to as high as 4.64% in July from the record low of 3.36% in December, based on Bankrate.com data that started in 1998.
U.S. home prices climbed 2.45% in the second quarter from the first, according to responses from economists ahead of the report from the Federal Housing Finance Agency. It would be the steepest increase since 2005.
Sales of new U.S. homes rose in June to the highest level in five years, Commerce Department data showed.