Apr 122017

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By G. Steven Bray

Investors abhor uncertainty, and last week certainly provided plenty of it. Will the response to the Syrian gas attacks lead to more US involvement in that country’s civil war? How are the Russians and Iranians going to react? Are North Korea’s threats more than chest-thumping? What’s the US carrier group doing in the Sea of Japan?

When investors see uncertainty, they tend to buy safe assets, and US government bonds are among the safest. Lots of bond buyers leads to lower bond rates, and because the US government backs most US mortgages, we also get lower mortgage rates – in fact, the lowest rates of the year.

So, are we seeing a sea change with rates heading lower, or will they bounce higher again. The chances for still lower rates are real, but that probably depends on continued headlines to churn investor sentiment. The President set markets on fire again today with comments suggesting the dollar is too strong.

Rates rose after the election largely because of expectations for the Trump agenda. While markets seem to have realized the agenda will take time to implement, positive movement on policies such as health care and tax reform could keep some pressure on rates.

More concerning for those wanting lower rates is the voices of the Federal Reserve. The Fed has a huge portfolio of mortgage bonds, and it replenishes that portfolio by buying more bonds with the money from paid-off mortgages. Fed governors have been talking about reducing the portfolio. Pundits are convinced mortgage rates will have to rise to find bond buyers to replace the Fed, and the market will start pricing in those higher rates long before the Fed pulls the trigger.

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