Fed Chair Comments start slight bond rally!

In Ben Bernanke’s testimony today before Congress he painted a grim picture on the current economy and has given every inclination that the Fed is poised to deal with the recession fully knowing that all that they do to fix the economy now will mean that they will have to reverse once the economy is going to stop the inflation that is currently happening.

So what does that mean to you? Short term rates are going to go down further. Your credit card rates and home equity rates should come down some for the next 6-12 months. However, once the Fed sees the economy start to recover and they begin their inflationary fight, those rates will go up and they will go up quickly. Long term rates in theory should come down, however if you review Mr. Bernanke’s testimony you will see that even when pressed on why the disparity between short and long term rates he was elusive and evasive in his reply and hung his hat on not commenting on short term price fluctuations in the markets. So what does that mean? Well what it says is that he is aware that his words carry huge weight with the money managers of the world and if he was to voice an opinion it could have a tremendous effect on the movement of those markets.

So when are long term rates coming down? If you follow the money, always the answer in solving any problem, the major money managers have been building their cash positions. With so much uncertainty in the markets, percentage of cash has increased in almost all investment funds. Once the money managers have a clear idea of the direction of the Fed, you will see them begin to take their positions and use up that cash. Here is the simple truth, if they have cash and are being paid money market rates for that cash, if the Fed lowers rates, then they will earn less on that cash. At some point they will have to move that cash into positions that will guarantee a return for them and the fixed equity market, i.e. bonds and mortgage backed securities will probably be the choice for that. They can lock in their return and know that when the Fed changes direction either later this year or early next year that they will be able to unload those investments and get into more lucrative opportunities. Therefore, it is my belief that we are going to see in the near future, next 30-60 days long term rates come back down below 6 % and we may even see rates close to the 5.5% level. The period of time that they will be there will be brief, could be as short at 24 hours and as long as a month, but once they hit the bottom, they will bounce hard back and we will be hard pressed to see those rates for a long time.

My recommendation to any borrower is get in touch with your lender of choice and be prepared to take advantage of these rates when they come. It may be YEARS before we see them again.

For questions or comments, please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.