The word “taper” seems to be on everyone's lips these day. As we note above, the Federal Reserve holds the key to higher interest rates. Most market watchers are simply waiting for the Fed to cut back (or “taper”) its purchases of Treasury notes and bonds and mortgage-backed securities. The consensus belief is that when tapering begins, rates will rise.

That could be true. But then again, market's are anticipating entities. It's also possible that any interest-rate increases won't be very pronounced, because once tapering begins, its effects will already be built into lending rates.

The same market watchers are also speculating on how the Fed will tape: will it taper purchases of both Treasuries and mortgage-backed securities, or only taper Treasuries? If it tapers only Treasuries, it's possible that mortgage rates won't be effected, at least that's the prognosis we've heard.

We're not so sure that how tampering materializes matters, because Treasuries are benchmark instruments. The 10-year Treasury note, in particular, is very influential on the 30-year fixed-rate mortgage. As one goes, the other follows in lock-step.

The point we want to emphasis is that regardless of how the Fed tapers it will impact the mortgage market. Unfortunately, we simply don't know the magnitude of the impact.

   Courtesy of Jessica Regan.

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