Mortgage Bonds are trading lower on fears about the Fed’s future direction and ability to fight the threat of pending inflation. It appears that Obama will be tapping San Francisco Fed President Janet Yellen to take over the Vice Chairman of the Fed position, soon to be vacated by Donald Kohn. Yellen has been an extreme dove, championing near-zero interest rates and a massive expansion of the Fed’s balance sheet…even in the face of warnings from many regional Fed officials who advocate pulling back monetary stimulus more quickly, on the concern of future inflation. Bond Traders didn’t like the appointment, as the prospects for higher inflation will rob Bonds of their value over time, since the return of a Bond is a fixed payment.
And it isn’t just Fed officials who have been warning against inflation. Although Ben Bernanke continues to pitch low inflation, investors around the globe are having increased doubts. Massive debt plus massive balance sheet expansion, combined with near zero interest rates for a long period of time, will no doubt conjure a recipe for inflation.
When will we see the first signs of inflation? As business conditions improve and confidence increases, individuals have a tendency to spend more freely. So, profits earned by one business person are re-spent in another business on other goods and services…and so the chain begins and continues. The same dollar being spent over and over is the Velocity of Money. When the Velocity of Money increases in both speed and duration, it is often accompanied by inflation.
Some good news out of the retail sector, as the latest Retail Sales Report came in better than estimates. Despite stormy weather in many parts of the country, Retail Sales for February rose 0.3%, well ahead of the -0.2% expected. This is a good report, but keep in mind it will be subject to future revisions like we saw in today's report, which revised last month's decent 0.5% reading sharply lower to just 0.1%. As economic conditions improve, we will see Retail Sales pick up. But remember, a pick-up in Retail Sales will influence the Velocity of Money.
Consumer Sentiment came in at 72.5, below expectations of 73.8. This was a disappointing number, which brought both Bonds and Stocks back towards unchanged levels.
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TODAY'S RATES
Does not include adjustments or incentives
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Product
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Rate
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Lock
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15 Year Fixed
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4.25%
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15 Days
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30 Year Fixed
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4.875%
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15 Days
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5/1 Agency ARM
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3.5%
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15 Days
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5/1 ARM -$2MM
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4.375%*
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15 Days
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