When Did Bernanke Lose Control?

The initial knee-jerk reaction to QE3 and the extension into unlimited free money forever last September sent mortgage spreads dramatically lower and sparked a super-excited flood of cash into cheap-to-finance REO-to-rent housing markets. This created the faux-prosperity that even Bernanke is banking on in our housing markets now. However, that mortgage spread (the difference between 30Y mortgage rates and 10Y Treasury yields) compression slid wider from its initial move but had stabilized. Until, that is, Bernanke mentioned the 'Taper' word - at which point the mortgage market moved well beyond its pre-QE3 levels and things began to escalate.

While Bernanke has done his best to convince us that the Fed will be here, the mortgage market seems to be a non-believer and even at $85 billion a month (across MBS and Treasuries) he has lost control of the mortgage market. As Bloomberg notes, the tone of Bernanke’s comments were "very assuring and soothing, but that’s like a mother telling her baby that she will be leaving in a very gentle voice," said one mortgage trader, adding "the baby will still have a fit."