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Stock Market Commentary & Forecasts, Financial & Economic Analysis

Welcome to Profit Confidential • Monday, May 21, 2012

Where Rates Are Headed Now

Monday, April 26th, 2004
By Michael Lombardi, MBA for Profit Confidential

Some of the most frequent questions I’m asked of late are directed towards interest rates: Where are rates headed? Should I lock in my mortgage or keep it variable?

Predicting interest rate movements is much easier now than it was ten years ago. Congressional testimony by Greenspan, hundreds of bank and brokerage economists analyzing the financial statistics, Federal-fund futures contracts, and the bond market itself are all useful in helping forecast the direction of interest rates.

Right now, the Federal-funds rate of 1% is at a 46-year low. Interest-rate futures contracts are pricing in a 50% chance we will see a quarter-percent rise in rates this June. Longer-term futures contracts are more conclusively betting interest rates will rise to 2% by the end of this year, with the first Fed tightening coming in August.

I’m a big fan of watching the bond market as an indication of where interest rates are headed. If interest rates are to rise ahead, you can usually tell by falling bond prices. Conversely, if rates are to fall, bonds usually move higher in price. Hence, bond investors have done quite well since interest rates started their big decline in the early 1980s.

After the better-than-expected U.S. job figures came out for March, bond prices tanked. Friday past, the popular U.S. two- year note yield stood at 2.23%, up from 2% only a weak earlier. This is the highest level since August 27, 2002. The strong action of the U.S. dollar has also discounted a rise in rates. (In Canada, the opposite is happening. The weakness of the Canadian dollar looks like it’s discounting a decline in rates, not an increase).

So there you have it. Unless things change, the market is telling us the U.S. Federal-funds rate could rise to about 2% by the end of the year, with the first rate increase coming in August. Is it a good time to lock in interest rates if you have a mortgage? I would think, “Yes.”

What remains to be seen is how higher rates will affect the consumers’ appetite for taking on more debt. Increasing interest rates by one-percent means an extra $2,000 a year for a $200,000 mortgage-not a very big number. But the recent action of real estate stocks is telling us a different story. The price of new home builder stocks have formed a major top. Maybe the market knows something about the future demand of new homes we don’t.

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Profit Confidential AuthorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter

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