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Markets Turned Quickly And Left Rate Shoppers In Their Wake

April 12, 2007 by Scott Kinne

Fed Futures Chart (Apr 9)

So, just how quickly have the markets turned?

According to Fed Futures Trading as watched by the Cleveland Federal Reserve, on March 13, it was as likely that the August Fed Funds Rate level would be 5.250% as it would be 5.000%.

In other words, markets were betting with equal odds that the Fed would drop rates as it would keep them steady.

Today, 30 days later, the odds are decidedly not 50/50.

Today, as the divergence between “blue” and “purple” show in the graph above, the probability now reads 75% vs. 15% in favor of the FFR staying put at 5.250%.

Markets have only a small bet that the Fed will drop rates prior to August.

This abrupt change in sentiment reflects the growing concerns that inflation continues to dog our economy. Remember, when inflation is present, the Fed tends to raise the FFR in hopes of slowing down the economy.

From a mortgage rate perspective, this partially explains why rates have been rising steadily over the past month. The more likely it is that inflation is present, the higher that mortgage rates will trend over time. Inflation pushes mortgage rates higher because an inflating dollar is worth less money.

Therefore, investors in mortgage-backed securities demand a higher interest payment on their mortgage bonds to compensate for that.

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Scott Kinne

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skinne@fhmtg.com

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