Feb 132017
 

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By G. Steven Bray

The bond market seems to have leveled off waiting for something to give it direction, and that something may happen this week. Fed head Yellen testifies before Congress on Tues. In the past she’s used these opportunities before Congress to clarify the Fed’s intentions. The question on deck is when is the Fed going to stop purchasing mortgages.

The Fed has an enormous portfolio of mortgages. When one of these mortgages pays off (through a home sale or refinancing), the Fed has been buying new mortgages. Recently, a couple of Fed governors indicated it’s time to stop these reinvestments and allow the Fed’s portfolio to shrink.

Here’s the problem. The Fed buys one to two billion dollars of mortgages each day. If the Fed stops buying, investors have not shown a willingness to pick up the slack. It might take higher interest rates to clear the market.

Yellen is unlikely to announce this policy change outside a scheduled Fed meeting. However, if she hints that the change is coming soon, markets are likely to lead off with higher rates.

The other things I’m watching this week are the inflation reports Tues and Wed and reaction to Pres Trump. Both could be negative for rates.

As I said last week, the report on wage inflation was comforting, but it’s not the only inflation report. If this week’s reports hint at budding inflation, they’re likely to boost rates.

Rates last week turned higher after Trump announced he’ll reveal his tax plan soon. Equity market loved that and rallied to new highs. That seems to have left less money for bonds causing rates to rise a little. As long as investors are feeling good about the future, I think we’ll continue to see some upward pressure on rates.

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