Yesterday I posted a snippet from the Wall Street Journal offering the eminently sensible suggestion that the bond market rallied, despite the indication that more FOMC rate hikes are likely, because the Committee's statement drew a picture of a relatively benign inflationary landscape. Then this morning brought this analysis from a New York Times article:
... it appeared that the drop below 4 percent was less a result of economic fundamentals than of technical factors in the Treasury market. Those included hedging against losses from a potential new surge in home mortgage refinancing if the yield on the 10-year note, which has a major impact on mortgage rates, falls even further.
If there is another refinancing surge, mortgages held by investors would be paid off and replaced with mortgages at lower interest rates. To hedge against this loss, the managers of big mortgage portfolios buy Treasury securities or similar instruments. The prices of these securities will rise if rates fall further, offsetting some of the losses from taking on new, lower-rate mortgages. This buying to hedge, however, also sends overall rates lower.
One analyst said Treasury yields were also being pushed lower by investors who had bet that longer-term rates would rise when the Federal Reserve began raising its benchmark rate. To reduce the losses from this bet, investors have to buy Treasury securities.
"These things tend to feed on themselves, and you get these swings in the market that get exaggerated," said William Prophet, an interest rate strategist at UBS.
Because of these technical factors, rates could fall further for a while and go much lower than expected. Rates, however, could pick up again when the technical buying slows down.
Now my head hurts. I'm sticking with the WSJ analysis over the NYT. But then again, that's my default position on almost every topic.