Tug Of War

The Winner: Inflationary Expectations

There has been a tug of war going on in the interest rate markets between a slower economy (lower rates) versus inflationary pressures/expectations (higher rates). Well, the dam wall has finally broken in favor of higher interest rates.

You can see the chart to the left of the 30 Year 5.5% FNMA Bond breaking below the 200 day moving average. This is a significant break. For those looking to refinance, the odds are that we will see higher interest rates. The next chart is more stark.

30 Year Index

The 3o Year Index, below, is showing a breakout above a long established range going back to last November. The big problem, as I see it, is that the chart is not yet over-bought (this is a yield chart, not a price chart, so the chart is inverted). From a momentum standpoint (Wilder RIS) , imo, this chart needs to go through the process of getting overbought, pulling back, and then having a failing rally. During this momentum process, interest rates can go significantly higher. We could be at a 6.75% 30 year fixed mortgage rate in fairly short order.

As you can see above, interest rates have been in a trading range going back to November '07. We are breaking above this range today.

With the inflationary pressures already in the system, combined with all the Fed stimulus that has been going on for the last 8 months, plus the fiscal stimulus that has been added, I really don't see interest rates turning back. The low rates have been nice while they've lasted, but I believe they are now history. I hope I look back on this post in a few months and find that I was totally wrong, but I don't believe that's going to occur.