Good Monday AM,
Bond yields are continuing to drop as the equity markets continue taking a beating. The Dow is down 1050 points as I type. This is now the worst January in the history of the stock market! We are now below the 200 day moving average on the major indexes and many consider this to be official bear market territory. It has been a blood bath for investors because many did not see this coming and January is historically a seasonally strong month for stocks. Bonds are benefiting from a flight to safety and investors move out of risk assets into the safe haven of bonds. We are seeing continued signs of a slowing economy which is helping bonds and hurting stocks. This puts the Fed in an even more difficult position. As I mentioned last week, the Fed is backed into a corner and currently feels it must raise rates despite a clearly cooling off economy. Raising rates will further the cooling off and all of a sudden inflation won’t be the issue, deflation could be. Any rate increases we see during the first half of the year, will likely be walked back at some point in the second half of the year. For now, we must wait for the first increase which could come anytime (the Fed meets tomorrow and Wednesday with a policy statement at 11AM Pacific time Wednesday) and then see how investors digest it. With each rate move higher, the likely outcome is the yield curve will flatten. This means that we could see the longer end of the curve (10-30 year bonds) come down in yield while the shorter end rises which will be great for mortgage rates. However, this is not a good thing and almost always leads to a recession, forcing the FED to again lower rates.
Please remain safe and healthy, make today great.