Fed struggles with 'real recession' possibility
Mortgage rates fell again this week, now the lowest since February. The 10-year T-note has held a 4.2 percent-4.3 percent range, taking even the lowest-fee 30-year mortgages to 5.75 percent, but I can hardly over-emphasize the instability in the markets. The prevailing theory causing stocks to sink and bonds to do well is unproven, unprecedented, improbable – and might be correct anyway.
One lesser theory died quickly this week, the notion that the huge, two-week bond rally taking rates down almost a half-percent was a mechanical mirror of a straight-down stock market. Last week was stocks-straight-down, Wall Streeters offering clients the traditional euphemism, "unexpected volatility," bonds improving at each stock slide. This week stocks entered true volatility, down 100-Dow points Wednesday, up 200 on Thursday, sinking again today, but bonds held steady.
The real bond trade has not been tied just to stocks, but to energy prices, inflation, and expectations of the Fed and the economy. For anyone who lived through the 1970s, or studied them – let alone worked in financial markets then – the theory behind this vigorous return to very low long-term rates is wishful.
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