Financial Markets Hoping to Stabilize

Global financial markets remain on shaky ground as the strength of the US Dollar continues to destabilize other currencies.

At some point, the Fed may need to evaluate and consider a possible intervention. The problem was exacerbated by the UK’s recent decision to lower taxes on their highest income earners.  This highly inflationary decision caused inflation in the UK to spike even higher, while simultaneously causing their bond prices to fall sharply.

Further, this was one of the primary reasons mortgage rates moved higher last week. Proving that lawmakers aren’t economists, lawmakers were forced to roll back the tax breaks after witnessing the destruction of their decision.

The sheer lack of liquidity in bond markets around the world threatens to destabilize borrowing costs, which we have certainly seen here in the US. This is what happens when you both raise short-term interest rates as well as reduce the Federal Reserve’s balance sheet simultaneously at a time when the US economy is weakening.

Will the Fed be forced to change direction in the near term? It is certainly possible that the Fed will be forced to inject liquidity into the bond market if financial conditions continue to weaken.

After pushing mortgage interest rates to the highest point in nearly 20 years, mortgage bonds are rebounding this morning. Many economists are predicting that we have seen the highs of mortgage rates in this cycle. Hopefully, this is correct. In the meantime, we will suggest a floating stance as we wait to see if mortgage bonds continue to improve.