@Hoya08 wrote:
The FED is buying a finite amount of bonds while the rest of the market is slowly moving out of the bond market. The FED is not increasing their purchases to make up for those moving out. That's what is causing the rates to rise. As the economy improves, the FED will reduce their purchases and cause rates to rise even more. 6% to 7% rates by the end of the year is not inconceivable, but, IMO, mid-5% to 6% rates are more likley.
Small correction: Fed buying has been causing demand side pressure in the MBS market. Like any other bond / quasi-bond, with MBS'es as price goes up, yield goes down. It's an inverse relationship.
With the Fed buying large quantities of MBSes every month, the finite supply factor leaves less for other investors. Demand spikes. More demand, higher price - higher price, lower rate.
As Fed buying decreases, the demand side pressure that buying has been causing will decrease as well, and prices fall. When prices fall, yields go up. From your perspective, that means that the rates on the underlying mortgages that are packaged into MBSes have to rise as well in order to make the product viable.
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