29 Jan Safe play is to lock
Japan shocked the markets this morning with a surprise announcement that they moved their interest rate policy to a negative rate for the first time in history in an attempt to stimulate growth. This historic move happens as many economies around the globe are moving to a more accommodative rate policy while the US is tightening and raising interest rates. In a recent interview, ex-Fed Chair Ben Bernanke said that he believes that negative interest rates are something the Fed should consider to counter the next serious downturn. The expectation for rate hikes in the US has now backed off the ridiculous 4 the Fed anticipated in December, down to where the markets are expecting 0 rate hikes in 2016. We have talked a lot about this in recent weeks, and feel the Us economy is not yet ready to sustain increasing rates. It’s nice to see others join our camp.
The Advanced read on 4th quarter GDP was reported at 0.7%. This is well below the 0.9% growth rate anticipated, and significantly lower than the 3rd quarter read of 2.0%. This puts the average quarterly gain at 1.8%, which is the lowest since 2014. Overall, this is a negative sign for the US economy, which usually has a stronger 4th quarter than the proceeding 1st quarter of the following year. This could set the stage for an even lower quarter announced when we receive final 1st quarter numbers in April. Combined with the news out of Japan, this pushed bond prices above the resistance line they were battling, and helped move mortgage interest rates to their lowest levels since last April.
Now that bonds have broken above resistance, bonds now have a nice floor of support. However, they are at the top of an upward channel, which increases the risk of floating. It seems likely for bonds to move towards the bottom of the channel before making another run higher. If you can stomach the risk and don’t need to close for a while, you can consider floating. However, the safe play will be to lock. The old saying, “Pigs get fat and hogs get slaughtered” is a fitting statement for the current market. The greed of a lower rate could cause many to get slaughtered in the end.