Up-that’s where rates are going to go. Why you ask? Well, it has to do with the Federal Reserve’s decision to bring Quantitative Easing (QE) to an end. For what feels like forever, the Federal Reserve has been buying, or investing, in Billions and Billions worth of bonds. Interest rates are tied to these bonds, and when the bond market is good (like now), rates stay lower. Conversely, when the bond market slows down rates will increase. With QE wrapping-up, we will finally see an end to this run of historically low interest rates.
When will it stop?
The Fed members are known for not agreeing on lots of different topics, but they are unanimous on the fact QE must stop by year end–some members even want it finished by summer. If you’ve been putting of that home purchase or refinance now is the time to act.
What kind of “bonds” are we talking about?
When I talk about the bond market, I am referring to the market that takes groups of home loans and bundles them together. People then invest in a group of loans with certain characteristics, and a certain expected level of return.
Who will buy the bonds the Fed has been buying?
That’s the big question. When there is unrest around the world (like Crimea), we tend to see more investment in bonds given that they’re less volatile. When things seem more stable, people to tend to invest in things with more risk and bonds go down which in turn drives rates up.
How far up will rates go?
I project rates will land somewhere between the current rates and the historic average. I’m thinking 4.5% to 5.25% range by 2015.
Wait! If the Fed has been investing in bonds, are they going to see profit?
Why yes, they are. The Fed buying bonds isn’t entirely bad in the sense that they are not just throwing tax payer money away (or rather money “created” to spend). They can actually make money from their investments. What I want to know is what they are going to do with the profits? Buy more bonds?
Over the next few months, as QE continues to roll down, you will see rates go up bit by bit. The markets are very sensitive to moves around QE and you shouldn’t be surprised if comments from the new Fed Chair, Janet Yellen, gets everyone all stirred up. We all knew the party couldn’t last forever!