Where Will Bonds Go From Here?

If you have been in the market to buy a home recently, chances are you’ve noticed that mortgage rates have gone up from their lows many months ago.  While this is causing some home buyers to lock up a mortgage due to fears that interest rates will continue to rise, others are being more patient using the “wait and see” approach.  The latter group is still not convinced that rates will continue to rise and are expecting them to come back down once we have a firm announcement from the Fed regarding their plans to taper bond purchases. 

This all started back in May 2013 when the Fed revealed indefinite plans ( or “intentions”) on slowing down the rate of bond purchases.  While no date has been announced when the rate of asset purchasing will decrease, market participants began selling bonds soon after the Fed’s announcement in May (See chart below).

As the sell-off in bonds continued, the price of bonds went down, yields went up, causing interest rates to rise.

As we wait for the Fed’s expected announcement this month on their plan and timeline to decrease asset purchases, speculation will continue to add volatility to the fixed-income market as participants try to predict what will happen.  Eric Hickman, portfolio manager of Kessler Investment Advisors, a CTA that trades strictly U.S. fixed income futures, truly believes that the Fed is being premature in their plans to taper quantitative easing.  Mr. Hickman believes that many economic indicators are still extremely weak, and therefore, it is not yet time to begin a slowdown of asset purchases.