Mortgage bonds continue to hold their ground, even under the relentless recovery of the stock market. Once again, this points out the disparagement in views of the true strength of the US economy between stock and bond investors. In my opinion, smart money is found in the bond market, so I give more credibility to the outlook of bond holders than I do to the return chasing investors found in the stock market. If bond investors are holding their positions in bonds, it is a sign of concern.
The Federal Reserve is now in the final stage of their January FOMC meeting, with an interest rate and policy decision due today at noon. The Fed will not be changing the short term interest rate. However, the most important component of today’s meeting conclusion will be the statements by Fed Chairman Jerome Powell that will immediately follow the initial rate announcement. The key questions will likely surround the Fed’s balance sheet and whether or not they plan to expand that in the months to come. I firmly believe that we are in an artificially strong economy; one that is strong solely by being propped up by the Fed. If the Fed were to decide to shrink its balance sheet, I believe we would quickly be in a recession.
Given the limited hopes of significant improvement to rates, now is a great opportunity to lock.