Last week, the FOMC directed the Desk to reduce purchases of Treasury securities to $ billion per month and purchases of agency MBS to $ billion per month starting in October. The Committee also indicated that it will end the current purchase program at its next meeting if incoming information broadly supports its expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. It also directed the Desk to maintain its agency MBS and Treasury security reinvestment policies – activities it separately announced it expects to continue after it begins to increase its target range for the federal funds rate. Should this course come to pass, the domestic securities portfolio will peak at a par value of about $ trillion – more than a five-fold increase since the start of the financial crisis in August 2007. The composition of the portfolio will also remain more complex. Formerly composed entirely of Treasury securities, the domestic portfolio is now only 60 percent Treasury securities, with the remainder held in agency MBS (and a small amount of agency debt securities). As I noted earlier, the weighted average maturity of the Treasury portfolio has lengthened substantially, while the MEP essentially eliminated the portfolio’s holdings of any Treasury securities maturing prior to February 2016. Meanwhile, it’s hard to predict the exact pace at which the SOMA portfolio’s agency MBS holdings will pay down over time given the prepayment uncertainty associated with those securities.
The current unusual circumstances are one of the main drivers for the prolonged boom in the local property sector. The risk of over-heating in the property sector to financial stability in Hong Kong is no smaller than that seen in 1997. We should note in particular that while mortgage rates were generally over 10% in 1997, after the burst of the property bubble, US interest rates have fallen, and mortgage rates in Hong Kong have spiralled down reaching about 2% in 2004. The situation we faced now is just the opposite. Mortgage rates are around 2%. And, even if the low interest rate environment were to remain until 2015 as anticipated by the US Federal Reserve, the US interest rates are bound to head back to more normal levels. Will mortgage borrowers in Hong Kong then be able to withstand the impact of interest rate hikes and property price falls? For example, under a 30-year mortgage, even though the borrower will be able to enjoy a low interest rate in the first two years, the repayment burden could become much heavier as a result of interest rate hikes in the years that follow. This could have serious consequences for the well-being of those families in the coming years. Therefore, I hope that the public will be cautious and should not underestimate the risks that rising interest rate could have on repayment ability, asset prices and the overall economy in Hong Kong. 2  BIS central bankers’ speeches