We're finally getting the move higher we had been expecting in bond prices. Mortgage Bonds are trading higher this morning, fueled by sinking Stock prices around the world forcing money over into Bonds. Global Stock markets plunged overnight as the $700 Billion rescue plan passed by the House and Senate last week is not being perceived by global investors as a "cure-all" for world economies and credit issues that are truly now a world-wide problem. But governments around the globe are scrambling to ease concerns and guarantee bank deposits, in an effort to avoid a global loss of confidence and run on the banks. Overnight, Germany, Ireland and Greece pledged to back their retail bank deposits. The Fed is pumping more liquidity into the system this morning, by announcing a doubling of its Term Auction Facility from $450 Billion to $900 Billion, and will also begin paying interest on the required reserves of the banks as was allowed by the bailout bill. The announcement however, contained no hint of a potential rate cut in the near future - which was perceived as a negative by Stocks. Typically, and contrary to the media and general public's understanding, Fed Rate cuts have an adverse effect on mortgage rates. However, with the world-wide financial crisis, it would be nice to see a coordinated effort by our Fed, the Bank of England, and the European Central Bank to simultaneously cut rates. This would help the currency markets remain stable. In the past, when our Fed has cut rates alone, our Dollar weakens, which is inflationary, and that is a big factor in the negative movement for Mortgage Bonds. But a coordinated effort would keep the Dollar, which has already made a major comeback against the Euro, near unchanged levels. This means that Bonds just might like a Fed cut, if it's done in tandem with other world central banks. By the way - Stocks would likely move much higher following a move like this. We are just speculating on this, but given the global financial situation, the stage is now set for a possible coordinated action. Currently, there is an 84% chance that the Fed Funds Rate will be lowered by 50bp at the upcoming October 29th Fed meeting. There are no economic reports scheduled today, but good old Dallas Fed President Richard "Loose Lips" Fisher and Chicago Fed President Charles "Big Boy" Evans both are due to speak on the US economy, which could have some impact on the Bond markets depending on their commentary. |
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