Thursday, February 28, 2013

The Fed Hold Off Again

Bernanke to the Rescue

In his presentation to Congress, Bernanke once again re-iterated the Fed's willlingness to continue to Bond purchases.  The stock market responded with over 150 point gain on Wednesday.

The Market was bouyed by the thought of continued low interest rates.  If you run a business, low interest rates mean cheaper equipment purchases, low rates on building expansions and purchases as well as lines of credit at banks for every day expenses and corporate bonds for financing big ticket purchases.

So do you know that you run a "business" everyday also?  Its called 'Corporation "Me"'.    The life and vitality of "Me" depends on funds to provide a roof over "Me"'s head, food in the belly, and clothing at a minimum.  Most business owners of "Me" can conjure up other needs for funds.

Thus, if your "Me" corporation(which may have a few subsidaries running about the house) needs more space or must downsize(due to casting off a few subsidaries in the past few years), Bernanke's speach should have you dancing in the streets also!!!

Though bond rates and mortgage rates don't track perfectly(but what in the financial market ever tracks with anything else!), these two rates do respond to one another in general ways.  If bond rates are going down(reduced yields is market term), mortgage rates tend to stay lower with less pressure to rise.

Why?   Great question....could be that both are traded on public market.  Though the investor wants the highest return, safety is important.  So if government bonds and corporate bonds are bought with a given rate of return, mortgage bonds/securities must compete to garner investments.

Do you need to worry about the intricacies of this dynamic?  Only if you plan to invest directly in these securities. 

You only really need to know that Bernanke's pronouncement means rates will remain constrained.   Thus, "Me" Corporations can still get insanely low rates to purchase a home.   Yet for how long is not known.

But don't miss that it is great news for the "Me" corps that need to unload property.  If you were a top 100 corporation in the U.S., you would realize low rates means that you can sell off a subsidary with good value at a good price because the buyer will have reduce long term cost due to low interest rates.  Likewise, any buyer for a "Me" corp. looking to change locations will also save lots of money over 30 years with a 3.5% mortgage rate versus historical over 7% average mortgage rate.

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