Central Banks Actions Expand – March 2020 Edition

Once again, the coronavirus dominated financial market news this week and caused extraordinary daily movements. For the second straight week, mortgage rates rose roughly one-half percent, meaning that they are now about one percent above the record low levels reached earlier this month.

Mortgage rates have increased over the last couple of weeks for two main reasons. First, many investors simply want to hold large amounts of cash during this period of uncertainty, so they are selling nearly every type of asset including mortgage-backed securities (MBS). The situation for MBS is amplified by the large amount of new issuance due to the recent surge in mortgage activity. The Fed has stepped in as a massive buyer, but supply still has been exceeding demand lately. In addition to bond purchases, global central banks have announced many other special operations to help address temporary strains in financial markets.

The second reason that investors may be reluctant to buy bonds is that government fiscal stimulus relief programs under consideration may add trillions of dollars to the budget deficit. This which would be funded by increased issuance of Treasury securities, and a larger supply of bonds would push yields higher.

The recently released economic data continued to show that the housing market had been performing very well prior to the epidemic. In February, sales of existing homes exceeded expectations with an increase of 7% from January to the highest level since February 2007. National median existing-home prices were up 8% from a year ago. The number of homes for sale was at just a 3.1-month supply nationally and was 10% lower than a year ago.

Looking ahead, the coronavirus will remain the main focus for investors. Daily announcements of special operations from the Fed and other global central banks are likely to continue, and investors will be watching for news about government fiscal stimulus relief programs. The major economic data will begin to reflect the negative impact of the epidemic to a greater degree.

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