Fed Slows Purchase of Mortgage Bonds

Fed Slows Purchase of Mortgage Bonds

Since the Fed cut their purchases of mortgage backed securities from $15 billion per down to $9 billion, mortgage interest rates have been slowly trending higher.  The Fed plans to continue to back out of the bond market as things continue to stabilize.  As the natural market slowly takes over, we can expect more softening in bond prices.  However, if prices fall too much and rates get much higher than current levels, I would expect to see the Fed step in and once again stabilize the markets.  My personal opinion is that the Fed will be in the market of buying bonds much longer than they currently anticipate.  As we move into recession life for a while, we will need the Fed’s help to maintain stability and control over the markets.

After two days of losses, stocks are trying to stabilize.  The S&P 500 has been hoovering just above and just beneath the critical 2800 level that we have been discussing in recent weeks.  A strong decisive break above this critical level would be a bullish sign that points towards continued gains in the future.  Given the weak earnings reports that we anticipate being released, we will either see stocks pull back or Price/Earnings ratios reach unhealthy levels.  I believe stocks are already overpriced for an economy that now has a 100% chance of a recession.  Considering that our country will now be strapped with many trillions more in debt, that will add a headwind towards future economic growth.  I believe that further stock gains would be irrational and unjustified for the current economic state of our country.

We will maintain a locking bias.