21 Dec Bonds at Critical Juncture
The House and Senate have successfully passed the largest tax reform bill in over 30 years. This sweeping piece of legislation is now sitting on President Trump’s desk for a final signature prior to it becoming law. Although he said it would be finalized before Christmas, it will now have to wait until January 3rd of 2018 to be signed into law. For President Trump to sign in 2017, it would trigger a forced cut to Medicare benefits. However, it will be signed. Just slightly behind the anticipated schedule.
The passing of the tax reform bill will be the true test of the long-time Republican argument of ‘Trickle Down Economics.” This popular phrase was made known to many American’s by former President Ronald Regan. Since the massive tax cuts Regan implemented (that Republicans claim was the catalyst for the economic boom taking place afterward), Democrats have argued that it was during times of increasing tax rates that lasting economic growth occurred. This will be an opportunity for both sides to look for arguments that support their beliefs.
Mortgage bonds have been forced lower, pushing mortgage interest rates to a 9-month high. Once again, bonds find themselves at another critical juncture. If the current floor is broken, things could get even uglier. Although much of the tax reform plan is already priced into the stock and bond markets, there could still be some that are late to the table and this will drive stock prices even higher. This will add continued pressure on mortgage bonds. For most people, the risk will be too great to absorb. As a result, we will maintain a locking bias.