John Murphy Reports

Bonds have been rallying significantly during the past few weeks.  (When US Bonds rally, their interest rates fall).   It’s unclear if interest rates have plunged due to The Fed’s work or if the economy is going to be in rough shape – or a little of both.  Here’s CNN Money’s article on the matter and a nice little chart they created.

The bigger change that has occurred in the market is the risk premium for mortgage backed securities has plunged in the past two weeks.  It was difficult for us in the real estate business during the month of February because we would see interest rates drop for US Treasuries and Bonds, but mortgage rates were not falling much at all.  Clearly that was because there had been a rising risk premium for mortgages.  The Wall Street Journal published this excellent chart from Deutsche Bank Securities depicting the risk premium for mortgages (a paid subscription may be necessary to read the article).

I stay tuned in to this pretty closely, and I am no market expert, but I’ll tell you I sense something has changed in the world.  Perhaps The Fed has figured out a way to put a bottom in the market.  I think housing prices will continue to slide, but it seems they have set the wheels in motion for an eventual improvement to the market.  I’ll have more on this at a later date because I think we’re seeing the banks and the government finally get their arms around how big a problem we have on our hands.  Once there is growing confidence on The Street about exactly what the losses will look like for the banks, the US economy will start to turn around.