Market Analysis

January 24th, 2008 11:37 AM
The bond market continues to suffer woes this morning.  I know it is confusing when the headlines in the press are just now that mortgage rates are at 4 year lows and that all eyes are on the Fed for another Funds Rate cut on Jan 30th of .25 to .50 points.   It is important to note that Fed Funds rate cuts are designed to lower rates on short term debt and can sometimes have an adverse effect on long term rates.   The best way I know to describe it is this:  knowing that the Fed is cutting rates aggressively to stimulate the economy, that a stimulous package is all but finalized and that all of this has a strong chance of jump-starting the economy and re-fueling inflation concerns that will cause rates 1 year from now to be higher, would you buy a 10,000, 10 year CD today paying 3.6% that had an additional risk of being worth only $9,000 when you try to sell it in 1 year?  That is what is going through the minds of long term bond investors.   Much of the movement lower we have seen in long term rates has been driven lately by short term investors temporarily "parking" their money in US Treasury debt and mortgage backed securities backed by Fannie Mae and Freddie Mac while they waited for the stock market to find its bottom.  These investors can just as quickly decide to move their money back to equities if they perceive that their downside risk (of a stock market collapse) is becoming minimal and that they may be missing the train on a stock market that is about to start moving up again.
Posted by Matthew Breston on January 24th, 2008 11:37 AMPost a Comment (0)
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