Tantrums And Tapers, TBAs And Mortgage Rates

To be an interested observer of things in the summer of 2013 was to be awash in the awareness of so many contradictions packed into one little piece of history. Forward guidance, for one, recognized the effects of markets. If QE was really effective, interest rates would rise not fall in anticipation of those positive effects.

This was, actually, the whole thing behind 2013’s “taper tantrum.” Ben Bernanke came up with a contrary scheme the year before when announcing QE3 hoping to head them off. He anticipated that his form of “forward guidance” would prove decisive; that is, the Fed’s Chairman promised QE3 would be “open-ended” and therefore the central bank would keep on buying MBS (technically TBA) no matter.

The idea was that markets would be more enthralled by the purchases than their expected success; rising rates betting on the latter being held in check by lower rates due to the Fed’s persisting bid.

More than that, Economists had further expected that this “easing” would kickstart a strangely lethargic economic system. After all, if you need three QE’s “something” is already amiss.

It all came to a head in May 2013. Bernanke, as I’ve noted before, never actually said the word “taper.” What that meant for the market was something else indeed; maybe QE3 (plus a fourth in UST’s) had worked, so like a cork held underwater interest rates exploded higher into what became Reflation #2.

Except, the economy hadn’t actually done much by way of accelerating. Even FOMC officials were still talking about “clogged transmission channels” and now we know one of them recognized QE’s monetary “head fake”.

The result was a toxic mix, one which confused and perplexed pretty much everyone for another year or so until the “rising dollar” of 2014 settled the matter once and for all. But along the way, more contradictions.

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Gary Anderson 1 year ago Contributor's comment

The economy in some ways is in worse shape than 2013, but the counterparty derivative markets may be stronger due to the existence of clearinghouses. That allows bankers to sleep at night.