Four Questions around Historical Volatility byTim McLaughlin
Should the markets have reacted like they have on the news of a Sovereign US downgrade? Fear sparks unexpected emotions. The downgrade, which was more of a warning to the US to get their finances in order, should have been perceived as nothing more than that. The difference between AAA and AA+ is like splitting hairs. France is AAA and their per capita debt load is significantly larger than ours is. This was more of a “straw that broke the camel’s back” scenario (worries of a double dip recession, concerns over fiscal issues in Europe, digesting what the debt ceiling agreement really means). The reaction to the downgrade (and all global news) appears overblown.
Shouldn’t rates have increased on the downgrade news instead of rallied? In a textbook economic world, absolutely. But the textbooks are obsolete, given the fact that Fixed Income rallied, further supporting the thesis that the downgrade was more scope then substance. Remember, S&P is also the rating agency that rated billions of Subprime paper as AAA, so strength and security is in the eye of the beholder. And if action rings true, the significant rally in Fixed Income solidified the fact that the US debt (Treasuries and Mortgage Backed) is as strong as ever as buyers came in in droves looking for a safe haven.
Mortgage Rates have free-fallen and the Fed came in Tuesday afternoon and said Fed Funds rates would be low “until mid 2013”. What does that mean? Do we go lower? The statement was more of a symbol to support the market then anything. Most of us already thought the Fed Funds would be low for a while longer anyways. But make no mistake – low Fed Funds rates til “mid 2013” does not necessarily equate to low mortgage rates in the same time period. For now, rates are back down at the historical lows of last year. However, alternate forces (Fannie/Freddie/FHA increasing fees, inflation, a pick up in the economy, buyers looking for alternate/higher yielding investments) all could send mortgage rates back up at some point in the future despite where the Fed Funds rate are as the curve could potentially widen, which we have seen in the past.
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