By John Sauro
Employment Report Does Little to Help Bonds
Investors rushed for the exits today in after having a 200 basis point gain since September 30 in Mortgage Backed Securities. You would think that the 95,000 job losses would have investors flocking to bonds, but not today.
Some investors took profits ahead of the long weekend while others moved money back into stocks anticipating the much rumored additional round of Quantitative Easing. It is likely that the selling will continue when the market re opens on Tuesday. Remember, Mortgage rates move higher when the price of Mortgage Bonds move lower.
Bernanke’s Speech
On Monday Fed Chairman Bernanke gave a speech Entitled ” Fiscal Sustainability and Fiscal Rules”. He issued a strong warning that the US Federal Budget deficit is growing and is on an “Unsustainable path”. And if not addressed soon, would mean “serious economic costs and risks’. “Concerns and uncertainty about exploding future deficits could make households, businesses and investors more cautious about spending, capital investment and hiring”
Benanke went on to say, ” a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity and economic growth.
While Mr. Bernanke has no official role in the area of tax policy, he cleverly said “economic conditions provide little scope for reducing deficits significantly further over the next year or two” and that “premature fiscal tightening could put the recovery at risk”.
In other words, the Bush Tax cuts should not be allowed to expire.
Bond Bubble
There is no question that the next bubble to burst is going to be the bond market.
And when it bursts, it will end quickly and decisively and it’s going to take mortgage rates with it. So, a word of caution to those who are trying to time the bottom. Don’t gamble a guaranteed $400 savings in your mortgage payment to save an extra $150.
I am recommending locking into rates at this time.