The conventional wisdom is that as stock prices fall investors move money into “safe-haven” investments like bonds. This drives bond prices up, and thus yields down, so when stock prices fall, interest rates usually go lower. (This is a simplification, but for our purposes today will do.)
Stock prices that are arguably inflated, international economic instability and a weak U.S. economic recovery have put stocks on edge as you no doubt know. See the Dow Jones average for the last three months to the right, and the S&P 500 Index for the last three months below.
Both charts show stock prices weakening in July and finally falling in late August. During this time, money moved into bonds as expected, and yields dropped as expected too. Both charts show, however, that for the last month stock prices have traded in a relatively narrow range as the market seeks direction. This is especially significant because we’ve had some very large intra-day swings in stock prices during this time.
Now look at the red line on the interest rate trends chart below. This represents the yield for 10-year U.S. Treasury Bonds. You can see money moving into the bonds starting in early July, as expected, yields dropping until late August, and then settling up a little.
The blue line – the FNMA 60-day yield, which represents the yield offered by Fannie Mae to lenders when they price their loans follows the pattern pretty closely, lagging slightly behind which is normal.
The green line, which represents interest rates locked by actual consumers during the week, follows closely as well.
Here is the important point, however. On the interest rate trend chart – which covers one year now – note how interest rates move up and down constantly. One month of extreme stability is not normal! Interest rates have hardly budged during the last month. Yields seem to be “idling” with an occasional quick dip or spike here and there that is quickly erased.
In my opinion, investors have their fingers on the buttons, but they don’t know whether to push the “buy” or “sell” button. When the market gives them a little clarity, we could see some dramatic movement.
Interest rates are still at a historic low – not as low as April of 2013, but not that far off really either. If today’s rates are good for you, it’s a GREAT time to act. If you want something a little lower than what is available today, get in line and lock on the dips, or if you see a large movement downward in stocks, please call immediately.
Soon – very soon, in my opinion – rates are either going to dive or jump. The odds of a very large move very soon have rarely been higher, in my opinion.
What do you think?