Nov 142016

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By G. Steven Bray

What a difference a week makes. Before the election, market analysts were virtually unanimous that a Trump victory would scare markets, resulting in temporarily lower rates. The spookiness lasted less than 12 hours. By the time the nation awoke Wed morning, markets had reversed their Tues night collapse. Market momentum kept bond buyers sidelined and pushed rates up.

If you search for reasons for the sell-off, you’ll probably find references to Trump’s policies igniting inflation. I’m calling BS. While that could be an outcome, the assumptions some analysts made – that he’ll tear up NAFTA, impose tariffs on foreign goods, and shut off immigration – are overblown and even if anything like them comes to pass, are many months, if not years, in the future. Tax cuts and infrastructure spending could boost the economy, but we don’t even have concrete proposals yet.

I suspect the reaction had more to do with the elimination of election uncertainty combined with concern that the European Central Bank will start closing the money spigot in Dec. Market sentiment started edging towards higher rates a couple months ago. The election just gave bond sellers a push, especially if they needed funds to jump on the stock market rally.

So, what do you do if you didn’t lock your rate before the election? I suspect we’re doing to be stuck with these higher rates for a while. That said, a big market move like this one increases the chances of a temporary reversal. Investors will see bonds as cheap and start buying, which will push rates down. However, such a reversal is not a certain outcome. I suggest you pick you maximum pain point, and if rates keep rising, lock if they reach that point.

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