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To: mishedlo who wrote (261731)	9/24/2003 7:55:44 PM
From: ild	Respond to of 436258

Mortgage Hedges Have Big Impact On Rate Changes By GREG IP Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- Hedging of mortgages can amplify moves in long-term interest rates by up to 30%, a Federal Reserve study has found, explaining a lot of the market turmoil surrounding the Fed's quarter-point interest-rate cut on June 25. Holders of mortgage-backed securities, such as Fannie Mae and Freddie Mac, often must buy Treasury bonds or make equivalent investments in derivatives when interest rates are falling, to hedge the impact on their portfolios. Since bond yields move in the opposite direction to prices, such hedging tends to push rates even lower. Conversely, when rates rise, mortgage holders tend to sell bonds, pushing rates even higher. The study, by Fed economists Roberto Perli and Brian Sack, found that such activity can amplify a given move in interest rates by 16% to 30%. That means if interest rates initially rise or fall one percentage point, mortgage hedging could turn that into a 1.16 to 1.3 percentage point move. Treasury yields plunged 0.75 percentage points between early May and mid-June on expectations the Fed would take radical action to prevent deflation, then rebounded by double that when no radical measures were forthcoming; they have since retraced some of that rebound. Some market investors and traders blame poor communication by the Fed for the turmoil, but Fed officials maintain that the improving economic outlook and mortgage hedging were bigger factors. The impact of such hedging has grown with the volume of outstanding mortgage-backed securities and homeowners' willingness to refinance.