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.

By Anthony Mirhaydari Sep 23, 2013 1:54PM

Arrows and Lights © DAJ, amana images, Getty ImagesLast 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 traders, this is creating an opportunity to get back into T-bonds via leveraged funds like the Direction 3x Treasury Bond Bull (TMF), which I've added to my Edge Letter Sample Portfolio.

 

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. 

 

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

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54Comments
Sep 23, 2013 2:51PM
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So who is this really helping Anthony? Those that actually need it, can't afford it and those that can afford it, don't need it. It's become a viciously deadly cycle for the working poor and declining Middle Class. Funny however how the S&P 500 can have 15 straight quarters of profit Growth but companies can't find a way to pay an living WAGE.

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.

Sep 23, 2013 2:39PM
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PRINT BABY PRINT !

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.

Sep 23, 2013 2:47PM
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Ruthless traders, take a bow ,,, you are manipulating the markets to perfection to sucker in honest investors.

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.

Sep 23, 2013 2:49PM
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Yeah the psycho fed will conjure up some more meaningless dow gains and cause even more market distortion, and higher fantasy asset prices. But no amount of printed money can bring  the jobs back from China and elsewhere (this is the real problem with the economy). And isn't the fed setting the interest rates low on government bonds so the government can borrow cheaply the ultimate conflict of interest?
Sep 23, 2013 2:26PM
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man, can you imagine how high the market would actually be if it was 'real'?? if job creation was REAL! instead of fictional obama fantasies?? REALITY instead of all the bullshyt leftist chicanery , lies and manipulation aka 'quantitative easing' nonsense? 'no taper'?? so when do we STOP 'tapering' exactly?? we can't do this indefinitely so, when??? when does gov't 'help' stop and the economy is left to move off on it's own without the market having a hissy fit?? hmm? I have yet to hear any of you money-geniuses comment on that! THIS SHOULDN'T EVEN HAVE HAPPENED IN THE FIRST PLACE!! IF the economy was growing 'without' gov't 'help' aka 'manipulation' or the worries of the insane socialist catastrophic obamacare nightmare, this economy would be stratospheric! instead of plunging into the depths of financial oblivion and bullshyte lefty-loony propaganda, that 'solves' everything and of course 'solves' NOTHING!!! and meanwhile, the idiots on msn spew the same inane garbage for the past 4.8yrs!
Sep 23, 2013 2:50PM
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No action can be taken.  Stratospheric?...highly doubt that as the fundamentals are not there.  You have a socialist "baby" and "babysitter".  You have 3+ more years of this entire disgrace.  He does not have the guts to piss in and he never did.  Hope to H that no one makes a mistake and gets rid of him.  Let him serve out his "deal" voted on by you welfare recipients.  He will be remembered in history as the absolute worst President at the absolute worst possible time.  Do not even go there with bailouts and stimuli......you have seen what happened there.  Nothing. He is an entire and complete idiot, period.
Sep 23, 2013 3:32PM
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The last two sessions have made Wall Street look like a complete idiots to it investers. Its gave away everything again over old rashed out news events!!!! They blame the Fed but this is a manipulation move again by Wall Street only!!
Sep 23, 2013 4:22PM
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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. 

Sep 23, 2013 2:27PM
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" ... 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!

Sep 23, 2013 3:19PM
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The Fed isn't going to the taper in October either since the US Government is going to be shut down.  So Mr. Market will have to wait until December and that could be iffy too if the budget, debt ceiling and government shut down turn out to be really tricky. That puts Jan 2014 in the crosshair and I wouldn't take that bet too seriously either. Soooo, we'll get a crummy $10 billion taper in January or March after 3-6 more months of $85 billion which means $250-500 billion more on the Fed's balance sheet. Merry Christmas Uncle Ben and a Happy New Year too. The 10 year rate at 2% by early next year? Buy gold?
Sep 23, 2013 3:32PM
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Wouldn't it be nice if Wall Street didn't believe every word that some "Tom, Dick and Harry" said!  Ya, tell me another one. Plus Wall Street always follows the "What, If, Scenario" I just wonder how many times Wall Street has been right with their "What, If, Assumptions" Let's put it this way I wouldn't bet my home or my life on their assumptions. Everybody knew that Wall Street would make a "Big To Do" over the budget stuff and the fed. They did it last month and why not use the same silly reason again to cause fear and panic around the world. Would anyone like to bet a dollar that the market will be down again tomorrow with the same, lame, boring, reason that they have used for the past 3 sessions??????
Sep 23, 2013 3:40PM
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Good thing that the "Revolution" TV series is coming back on this week...

 

A few of you on here, can get some "new" ideas.

Sep 23, 2013 3:47PM
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This just in --- in an attempt to keep rates up, Dallas Fed President Richard Fisher has been kissing Fed vice-chairman Janet Yellen at the start of every policy setting meeting.

In addition to being audited, when are we going to get National Inquirer and Star coverage of what is going on in those meetings. 
Sep 23, 2013 6:11PM
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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 ?

Sep 23, 2013 3:20PM
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What do you suppose this clueless shill gets paid to write this dribble?
Sep 23, 2013 6:14PM
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Cheap money was the cause of the 2008 crisis and it will kill the USD as the world's reserve currency.How many damn bubbles must pop before ordinary people get a clue?My God!!
Sep 23, 2013 4:45PM
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---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. 

Sep 23, 2013 7:39PM
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We should just start using this Comments section for relevant news and downplay the BS. Rates are coming "down" Anthony? They can't be serviced for-profit NOW... so what's the point?

Okay... on to REAL NEWS... they've got 4G in BFE! Really... passing through small towns where the economy has been sucked out of them and former industry looks like billboards for commercial RE firms off in some distant megatropis... some IDIOT installed 4G networks. You can scan the area for signs of technology, there aren't any... except along the main roads where brand outlets are. The PITY of it is-- there are no independent businesses left, just brand names that sweep the cash out every night. The towns have ZERO chance of recovery, much less the ability to buy the technology. WHEN do we get intelligence in our government? I think the Mall situation in Kenya is horrible, but it pales by comparison to all the terrorism going on right here in America. Gassed or gunned-down victims are DEAD. In America, business platforms keep us from standing up while sucking every cent of our paychecks away to places like Bensonville, AR and New York City, but not to the town the paycheck earner lives in. It's TERRORISM. It has to end or WE will. 
Sep 23, 2013 4:27PM
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I hope you're right Anthony... Unfortunately, given your track record.... well, you know.
Sep 23, 2013 6:44PM
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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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