Interest rates are coming down
A Fed-fueled rebound in bond prices is setting the stage for the first sustained decline in rates since March.
Last week's surprise "no taper" decision from the Federal Reserve -- which will keep its open-ended $85 billion-a-month bond purchase stimulus going -- has created all kinds of volatility in the market and caught investors by surprise.
While stocks and commodities are all over the place, the most sustained move has been bonds where prices have strengthened and yields have dropped in response to the Fed's actions. This is reversing a long downtrend for fixed income -- which in turn had pushed up interest rates -- going back to May.
The good news is, for the first time in months, we're about to see relief as borrowing costs decline. Here's why.
The dramatic surge in interest rates since May, which took the rate on 10-year Treasury bonds from 1.7% all the way up over 3%, was driven by hints from Fed officials that a taper would happen as soon as the economy revved up and the federal budget deficit narrowed.
Stronger growth diminished the need for cheap money stimulus. And a smaller budget deficit, plus the fact the Fed already owns about a third of the nation's long-term debt, meant that more stimulus could create problems in the financial markets. Indeed, earlier this year, Fed officials warned that the corporate bond market was showing signs of overheating.
Then, as bond prices fell and rates rose through late spring and into the summer, the corporate bond market got slammed, mortgage rates rose and stalled the housing market, the stock market got uncomfortable, and gains in the job market sort of petered out.
Thus, the Fed walked back tapering expectations. Now, the Wall Street consensus is that no action will be taken to lessen the cheap money stimulus until December.
As a result, the promise of the Fed's dollars continuing to flow into the bond market is pushing up Treasury bond prices in a way not seen since March. Because of the inverse relationship between price and yield, that in turn is sending interest rates down in a big way. The 10-year Treasury yield is already down 10% off of its highs to 2.7%.
Technically, with the iShares 20+ Year Treasury Bond Fund (TLT) crossing over its 50-day moving average on solid volume, it suggests that the upward trend for bonds, and the downward trend for rates, should continue until the end of the year.
Fundamentally, support for this move is provided by the specter of a government shutdown and/or a debt default if negotiations over the 2014 federal budget and the U.S. Treasury's debt limit go sideways in Washington.
During the last big budget fight in August 2011, which resulted in a downgrade of the U.S. credit rating by Standard & Poor's due largely to our dysfunctional politics, Treasury bond prices soared (and interest rates collapsed) as the market panicked at the thought the greatest nation on Earth could maybe, just maybe, not pay its bills.
So, while it's unfortunate our elected officials are still unable to find agreement on critical issues like tax and entitlement reform, at least middle-class families looking to refinance or buy a home will enjoy some rate relief in the weeks to come.
For conservative investors, the rebound in the fixed-income market is helping investment-grade corporate bonds enjoy their first tailwind in months. Just look at the way the iShares Investment Grade Corporate Bond Fund (LQD) is pushing out of a multi-month consolidation pattern.
Disclosure: Anthony has recommended TMF to his clients.
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Funny how the SuperRich have far more than ever before, new Record to nearly $28Trillion in the hand of around 199,235 individuals. In total, well over $40Trillion. It's been so good that North America reclaimed it's title of having the most Millionaires.
If it wasn't for folks staying in CASH, the number of Millionaires would be far higher. What's left is the stampede out the door when it all comes crashing down again. That's the cycle we have chosen via our corrupt elect officials whom are controlled by Mega Global Corporations. Bigger Bubbles and even Bigger Collapses.
It's the only way to insulate the economy short-term from all the fallout from regulations and social agendas and programs. The feds and corporate elite need enough time to get the "security" apparatus in place to "manage" the fallout when this baby comes down.
Advice: business off-books, learn and start farming, get pistols and rifles with alot of common and compatible ammunition, learn low-level trades, teach your kids reality if not too late.
Mr.Bernanke, did you see this quote?: The more people who speak from the Fed in one day, the less clarity there is,” Richard Sichel, who oversees about $1.9 billion as chief investment officer at Philadelphia Trust Co., said by phone.
Traders are manipulating every comment your colleagues make.
Sustained decline, Anthony?? Who are you kidding?! The interest rate drop is at best, a short term development.
The main reason Ben Bernanke talks about tapering is that by promising bond investors higher interest yields tomorrow, he hopes to fend off their forcing rates higher today. It is like the kid's joke:
Q: How do you keep an idiot in suspense?
A: I'll tell you tomorrow!
Sadly enough, the tactic works. Keep in mind that the more easy credit there is, the more easily the supply of dollars is expanded. Ordinary Americans have to suffer cost of living increase. Foreigners whose countries use dollars for international trade suffer a lot more, especially poor ones. The fact that the U.S. government covers up inflation with its asinine CPI and that it encourages other countries (especially Japan) to follow its bad example is no reason for us to cheer.
" ... no action will be taken to lessen the cheap [counterfeit] money stimulus until December." Boy, I am going to rush right out and by some if that $18 TRILLION printing of counterfeit money! I can paper my bathroom with it when the bubble bursts - again!
Good thing that the "Revolution" TV series is coming back on this week...
A few of you on here, can get some "new" ideas.
In addition to being audited, when are we going to get National Inquirer and Star coverage of what is going on in those meetings.
Why is anyone on here whining & complaining ? For you middle class folks, this could be the refinancing break you've been waiting for. But you won't have very long to act; Uncle Ben leaves us at around the end of the year.
Of course if you think about this a little, isn't it funny how this interest rate drop is happening the same time our 'fearless' leaders in D.C. are debating the debt ceiling. Hummm!
Oh EX-Rep: Respect is earned- never given ! And Obama doesn't one once of it after that comment about "them messing with me". Is he that conceited to think it's about him and not US ?
---Rebound in fixed income market?? When yields are falling, the fixed income is DIMINISHED! Anthony should have been touting fixed income products when yields were RISING, not when they are falling.
---The downgrade in the U.S. government's credit rating by S&P was caused by RAISING THE DEBT CEILING. In order to keep other agencies like Moody's at bay, the now-forgotten Supercommittee was formed to cut government spending. The sequester was a threat used to keep the Supercommittee honest. When the Supercommittee failed and the sequester was triggered, the spin was changed to blame the sequester for the bad economy! However, the sequester was created to ostensibly keep the U.S. bond rating from being lowered! Meanwhile, S&P has been beaten up by the Obama Administration. The credibility of all bond rating agencies has been compromised. Consider that China, the #1 creditor, has a lower rating than the #1 debtor, the U.S.!
---Stronger growth?? How would you know? The GDP mixes government spending with private sector investment. Nowadays, so-called growth is mostly increased government spending. Bring back the old Gross National Product (GNP)!
---Smaller budget deficit?? This is just a new scam! When the Fed buys mortgage securities from Fannie Mae and Freddie Mac at jacked up prices, these government sponsored enterprises can send huge tax payments to the IRS. The nominal deficit may go down, but this is just another way to fill up the U.S. Treasury with money created out of thin air by the Fed.
To the To Big to Fail and To Big To JAIL ! DIE BANK OF AMERICA DIE ! CHANGE THE NAME TO THE BANK OF THE
UN-AMERICANS ! IT IS THE BANK OF ABUSE AND PREDATORY BEHAVIOR ON 70% OF ITS CUSTOMERS !
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The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
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