It is better to do thine own duty, however lacking in merit, than to do that of another, even though efficiently. It is better to die doing one's own duty, for to do the duty of another is fraught with danger.
Bhagavad Gita, BC 400-, Sanskrit Poem Incorporated Into the Mahabharata
A lot of noise is being about the economy improving and even if things do continue to get better, there is a rather strong head wind building in the horizon. Interest rates have been slowly but surely rising over the past few months and given the current trend, it appears that the bond market has nowhere to go but down.
Our ballooning debt and inflation are labelled as the main culprits.
“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”
The housing market which experts state has just started to recover (our personal opinion is that it’s a long way from mounting a sustainable recovery) is going to be the first one to get knocked down and dragged down for years to come. Mortgages rates are trading close to 52 week new highs and given that the Fed has ended its $1.25 trillion program to purchase mortgage debt, rates will be subject to even more upward pressure.
The above chart clearly illustrates that bond yields have been rising for quite some time and one can quite confidently state that mortgage rates have bottomed. The Green circle represents the madness that hit the bond markets when investors panicked and flocked into bonds in the late 2008 to the early 2009 period. If rates can stay above the 4.75-4.90 ranges for 12 days in a row or close above this level twice on a weekly basis, it will mark the beginning of a new bull market in rates and long bear in bonds.
Christopher J. Mayer, a professor of finance and economics at Columbia Business School goes on to state “Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home”. Thus any hope of a long term recovery…
