"CUTS LIKE A KNIFE, BUT IT FEELS SO RIGHT" Bryan Adams And financial pros will tell you it's wise to never try and catch a falling knife. Seems like decent advice in general - but in the financial world, it means that when the price of a Stock or Bond is in the midst of a severe decline, be very cautious about stepping in to buy...even if it feels so right because the price starts to look cheap. That's because when prices declines sharply, it often gets even worse, making it hard to call the bottom.
That's why many investors, who attempt to buy on the way down, say the feeling cuts like a knife. And over the past week - Bonds have beendropping much like a knife, and home loan rates have risen by about .25% across the board.And speaking of sharp objects, Cupid's arrows might have been flying around everywherelast week - but little love came calling for the Bond market. First, Retail Sales for Januarywere far better than expected - which was good newsfor Stocks, but as money flowed intoStocks, pulled money out of Bonds and causedBond prices to move lower. Next, FedChairman Ben Bernanke gave it to us straight from the heart, as he testified that the Fed would keep the door open to more rate cuts, which worried Bond Traders about the risk of more inflation ahead. And unlike the media seems to believe, cuts to the Fed Funds Rate generally cause home loan rates to rise, not decline.
Why? Because Fed Rate Cuts can spur on more inflation, as it becomes less expensive to finance business and personal purchases. And as a result, inflation erodes the value of the fixed return provided by a Bond - so in theface of inflation, Bond prices fall, and home loan rates rise.
Finally, Moody's credit rating agency downgraded FGIC - one of the very largest Bond
insurers in the world. This is another concern for Bonds, as the downgrades of Bond insurersin turn threaten the ratings of the Bonds they insure. If the added safety from insurance on Bonds is in doubt, the yield or rate on those underlying Bonds must increase to compensateinvestors for the additional risk. All in all - a tough week for Bonds and home loan rates -read on to find what's in store for the week ahead. Please go to our website http://www.tombrewerjr.com/ for more information.
That's why many investors, who attempt to buy on the way down, say the feeling cuts like a knife. And over the past week - Bonds have beendropping much like a knife, and home loan rates have risen by about .25% across the board.And speaking of sharp objects, Cupid's arrows might have been flying around everywherelast week - but little love came calling for the Bond market. First, Retail Sales for Januarywere far better than expected - which was good newsfor Stocks, but as money flowed intoStocks, pulled money out of Bonds and causedBond prices to move lower. Next, FedChairman Ben Bernanke gave it to us straight from the heart, as he testified that the Fed would keep the door open to more rate cuts, which worried Bond Traders about the risk of more inflation ahead. And unlike the media seems to believe, cuts to the Fed Funds Rate generally cause home loan rates to rise, not decline.
Why? Because Fed Rate Cuts can spur on more inflation, as it becomes less expensive to finance business and personal purchases. And as a result, inflation erodes the value of the fixed return provided by a Bond - so in theface of inflation, Bond prices fall, and home loan rates rise.
Finally, Moody's credit rating agency downgraded FGIC - one of the very largest Bond
insurers in the world. This is another concern for Bonds, as the downgrades of Bond insurersin turn threaten the ratings of the Bonds they insure. If the added safety from insurance on Bonds is in doubt, the yield or rate on those underlying Bonds must increase to compensateinvestors for the additional risk. All in all - a tough week for Bonds and home loan rates -read on to find what's in store for the week ahead. Please go to our website http://www.tombrewerjr.com/ for more information.
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