Scammers Run To You

“CUTS LIKE A KNIFE, BUT IT FEELS SO RIGHT” Bryan Adams And financial pros will tell you it’s wise to never try and catch a falling knife. Seems like decent advice in general - but in the financial world, it means that when the price of a Stock or Bond is in the midst of a severe decline, be very cautious about stepping in to buy…even if it feels so right because the price starts to look cheap. That’s because when prices declines sharply, it often gets even worse, making it hard to call the bottom. That’s why many investors, who attempt to buy on the way down, say the feeling cuts like a knife. And over the past week - Bonds have been dropping much like a knife, and home loan rates have risen by about .25% across the board.

And speaking of sharp objects, Cupid’s arrows might have been flying around everywhere last week - but little love came calling for the Bond market. First, Retail Sales for January were far better than expected - which was good news for Stocks, but as money flowed into Stocks, pulled money out of Bonds and caused Bond prices to move lower. Next, Fed Chairman Ben Bernanke gave it to us straight from the heart, as he testified that the Fed would keep the door open to more rate cuts, which worried Bond Traders about the risk of more inflation ahead. And unlike the media seems to believe, cuts to the Fed Funds Rate generally cause home loan rates to rise, not decline. Why? Because Fed Rate Cuts can spur on more inflation, as it becomes less expensive to finance business and personal purchases. And as a result, inflation erodes the value of the fixed return provided by a Bond - so in the face of inflation, Bond prices fall, and home loan rates rise.

Finally, Moody’s credit rating agency downgraded FGIC - one of the very largest Bond insurers in the world. This is another concern for Bonds, as the downgrades of Bond insurers in turn threaten the ratings of the Bonds they insure. If the added safety from insurance on Bonds is in doubt, the yield or rate on those underlying Bonds must increase to compensate investors for the additional risk. All in all - a tough week for Bonds and home loan rates - read on to find what’s in store for the week ahead.

AND DON’T MISS THIS WEEK’S MORTGAGE MARKET VIEW - ALERTING YOU TO IRS SCAMS, TO WHICH EVEN THE SAVVIEST HAVE FALLEN PREY.

Forecast for the Week

After a closed market on Monday, all of the coming week’s economic reports will be delivered on Wednesday and Thursday - but don’t expect that any volatility will be limited to those days.

The most recent read on inflation will come via the Consumer Price Index, being reported on Wednesday alongside the latest Housing Starts and Permits data. And of particular interest - the “Meeting Minutes” from the last Federal Reserve meeting will be released as well. These Minutes give the inside commentary between members - and remember, Dallas Fed President Richard “Loose Lips” Fisher was not in agreement with the most recent cut to the Fed Funds Rate. His seemingly uncontrollable remarks regarding his concerns over inflation have rocked the markets of late, with Mortgage Bonds losing 187 basis points since his tirade on February 7th - that translates into about .375% higher for home loan rates. Bottom line - the inflation data and Fed Meeting Minutes could be real market movers. Since inflation erodes the value of the fixed return provided by a Bond, if the news of the week continues to reek of inflation - this could spell more bad news for Bonds and home loan rates.

Click here to read my “The Mortgage Market View” and “The Week’s Economic Indicator Calendar.”