No. of Recommendations: 3

Wall Street Journal, NOVEMBER 26, 2009, 11:01 A.M. ET

Agency Mortgage Bonds Soar

Mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae rose to their highest level for the year on Wednesday, buoyed by strong demand from investors seeking haven as the year draws to a close....

Investors' eagerness to invest in mortgage debt helped drive mortgage rates to all-time lows this week...

In the new year, concerns about the Fed's exit from the market may overshadow any gains.

Investors expect the Fed to stop buying these bonds at the end of the first quarter of 2010, ending the $1.25 trillion purchase program it started in January. Since the beginning of the program, spreads have come down from 2.7 percentage points above Treasurys. The central bank still has $228 billion more to spend on mortgages....
[end quote]

This article is written from the point of view of a bond trader. It explains why the mortgage-backed bond funds, such as VFIIX (Vanguard Ginnie Mae Fund), have been rising.

But it has other practical implications.

1. The end-of-year demand for risk free investments to lock in gains will the end of the year. At that point, investors will probably dump low-yielding risk-free mortgage bonds. This will cause mortgage rates to rise.

2. The Fed will stop buying mortgage bonds in March 2010. The bond market is likely to demand higher rates without the massive Fed support. That will cause mortgage rates to rise.

3. If you want a mortgage, get one NOW! Lock in a fixed rate. Don't get an ARM, because rates will rise in the future.

4. I plan to sell my shares of Ginnie Mae bond funds within the next couple of weeks. I don't want to be caught in the downdraft of a bond fund when rates begin to rise.

Wendy (cross-posted to METAR and Buying a Home)
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