Tuesday, November 17, 2009

Fed Set to Pull Props From Mortgages

So what's been driving up stock prices? Insane buying activity like this:

The $5 trillion market for bonds backed by the housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae is in for a shock when the Fed stops buying at the end of the 2010 first quarter.


The end of the Fed's mortgage buying means prices of mortgage-backed bonds will fall to a new market-clearing equilibrium. That means yields on new mortgages will have to rise to make them attractive to lenders. The resurgent mini-bubble in home prices - and stocks - thus has until April 2010 to run. Long-term investors may consider trimming their stock holdings before this hits. Me? I'll be looking to buy equities next spring, or even sooner if holiday sales crater.