There are three reasons why rates have spiked: (1) improvements in Europe’s sovereign debt picture; (2) improvements in the US economy overall; and (3) decreasing likelihood that the Fed will move again to “ease” or push rates down.
As we point out frequently, positive economic news sends investors into stocks and away from bonds (and mortgages), and this pushes rates up.
The “positive news” out of Europe, however, was merely some statements by the European Central Bank (ECB) that there will be attempts to mop up some of the excess debt with a “monetary response”. This, however, does nothing to address Europe’s overall problem of having far more they debt than they can possibly pay back with current tax revenues. The ECB probably does not have the power to address the problem adequately.
The U.S. economy still shows growth, but it is very slow and only marginal. The “positive” signals as of late have not been significant.
Finally, the Fed was expected to expand or renew its efforts to push or keep rates low. But, if the economy shows signs of growth, the Fed is less likely to do so.
In any case, Europe’s primary problems are not solved, and the U.S. economy is precariously perched, to say the least. We think negative headlines will surface in Europe again, causing stocks to retreat, bonds to recover and rates to come back.
Final point: we are not 100% sure, and rates remain extraordinarily low by historical standards. Hence, we continue to recommend locking now and then refinancing later if rates do come back.
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