October 26, 2010 4:39PMET
By John Sauro
Inflation Concerns Move Bond Prices Lower & Rates Higher
Over the past several months the ever growing fear of deflation has helped to put Mortgage Bonds into the stratosphere while keeping Mortgage Rates low.
However, in the last 24 hours, future deflation/inflation expectations have changed and investors beleive the Fed will be successful in creating inflation through their “Quantitative Easing” plans. This was obvious with yesterday’s results of 5-Year Treasury Inflation Protected Secutities (TIPS) Auction. For the first time TIPS were sold with a negative yield at -0.55%.
Tips investors are compensated at a higher amount based on an increase in consumer prices- that’s the reason for buying “Inflation Protected Securities.” The Pricncipal of a TIPS increases with inflation and decreased with deflation, as measured by the Consumer Price Index.
Additionally, Merrill Lynch said that the firm is reducing their investments in Mortgage Backed Securities.
So, What does this mean?
The media has realized that the Fed is warming up their money printing presses and will most likely open the gates to “Quantitative Easing” after their Nov. 3rd Fed announcement.
This means that those who are thinking that home loan rates will be moving dramatically lower after the November 3rd Fed announcement may be very dissappointed.
I reccomend locking into rates at this time.