 |
Well, that settles it.
Treasuries suffered their first annual decline since 2009 — with long-term notes and bonds that mature in 10 years or more losing a hefty 12 percent. The bond market — junk bonds, Treasuries, mortgage bonds and so on — had its worst year in 14.
And by all accounts, the losses are far from over. Even the ever-conservative Wall Street crowd is forecasting a further rise in 10-year yields. The average target, according to Bloomberg, is 3.4 percent by the end of 2014. But for all the reasons I’ve been sharing for months, I think that will ultimately prove far too conservative.
 |
| The Fed’s shift on QE is pushing bond yields higher and prices lower. |
One key factor is selling momentum. Ten-year note yields breached the 3 percent barrier for the first time in 2 ½ years as 2013 was coming to a close. When you pass through large, round numbers in the bond market, you often see follow-on selling from technically oriented investors who monitor those levels.
Another factor is the Federal Reserve’s total shift on quantitative easing. Just as I suspected, they agreed at their December meeting to start tapering QE by $10 billion per month. And since then, policymakers have followed up with comments and speeches suggesting they will lop an additional $10 billion off the program at every meeting this year. At least one official put a number as large as $20 billion on the table, assuming the economy continues to firm up.
We’re definitely still on track in that department. Around the holidays, we learned that durable-goods orders shot up by 3.5 percent in November, while a subindex that tracks business investment rose at the fastest pace since January. Jobless-claims figures have been fairly positive, while GDP growth for the third quarter was revised up to a greater-than-expected 4.1 percent rate.
Home sales have cooled a bit, as you might expect, what with mortgage rates rising. But the Fed has been fairly sanguine about the easing off of momentum because other parts of the economy are picking up the slack.
Long story short? I would still recommend staying the heck away from bonds in 2014, just like I recommended staying the heck away from them in 2013. If you’re a more aggressive investor, you can consider specialized investments designed to help you profit from the great bull market in interest rates.
And despite the mess in the bond market, there are plenty of profit opportunities presenting themselves in other areas. I’ll do my best to guide you to them now that the calendar has turned and a new year is upon us!
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 3 comments }
Mike,
I've been reading all of your articles closely especially since May when Bernanke testified before Congress and the bond market went crazy. I had been working as a loan officer for just over a year and had finally learned the business and was about to start making some really good money when, everything changed.
My office when from being like a scene from a movie, where the phones are ringing off the hook and everyone is working like crazy, to a ghost town in a matter of a month. Bussiness had stopped.
I graduated from college in 2007 with a degree in real estate and finance, just in time to see the real estate market and whole economy crumble. I've been trying to do anything and everything in the real estate world, commercial leasing, buying foreclosures for investors, and finally mortgages. The market keeps changing so fast that you have to keep changing to keep up with it and find where the money is being made.
I've always thought doing loans was a great business. I'd pull title on a property and I'd see they they may have bought the property years ago, but refinanced it several times since they purchased it. This, however, has been in an atmosphere where interest rates have been dropping for the last 30 years and we just hit the bottom of that and are moving back up.
Now every one that could refinance is in an extremely low 30-year fixed rate that you'll probably never be able to get again in this life time. I'm curios what you see as the future of the mortgage business now that we're at the end of this 30-year bull market for bonds and raising interest rates.
Do you think it will be as thriving of an industry as it's been in the last 30 years?
I believe the refi-centric mortgage environment we’ve been in for the past several years is clearly over. So the mortgage business will shift toward one focused more on home purchases. Even as rates rise, people will still buy homes if employment prospects improve and the economy expands. If home prices have bottomed out and are generally headed higher (with hiccups along the way), you will also see some people cash out equity for home improvements and other spending.
Long story short, the mortgage business will not disappear completely. It will just be a different one in the coming years than the one many loan officers grew accustomed to in the 2000s and early 2010s. –Mike
I believe the refi-centric mortgage environment we’ve been in for the past several years is clearly over. So the mortgage business will shift toward one focused more on home purchases. Even as rates rise, people will still buy homes if employment prospects improve and the economy expands. If home prices have bottomed out and are generally headed higher (with hiccups along the way), you will also see some people cash out equity for home improvements and other spending.
Long story short, the mortgage business will not disappear completely. It will just be a different one in the coming years than the one many loan officers grew accustomed to in the 2000s and early 2010s. –Mike