February Market Update

"THE NINE MOST TERRIFYING WORDS IN THE ENGLISH LANGUAGE ARE: `I'M FROM THE GOVERNMENT, AND I'M HERE TO HELP.`" Ronald Reagan. And regardless of if those words do indeed terrify you or perhaps give you confidence, the government held center stage last week, with a pivotal Federal Reserve Board Policy Statement, President Obama's first State of the Union address, and Ben Bernanke's confirmation for another term as Fed Chairman.

The Obama administration just released their 2011 Fedeal Budget, which runs from October 2010 to September 2011. It is estimated to come in at $3.8T, which is 3% larger than this present year's budget. Higher taxes for those making more than $250,000 are part of the plan - and although spending cuts have been mentioned, they appear to be largely window dressing. And this budget estimate could even be a bit on the optimistic side...if the economy does not recover as expected, overall tax receipts will decline, making the projected deficit of $1.3T even higher! How do you like this hope and change?

Remember, this massive new budget will ned to be funded by yet more Treasury auctions. And over time, the added supply of Treasury debt will pressure rates higher, as the goernment will ned to entice buyers with higher rates of return. This could have a negative impact on Mortgage Bonds and home loan rates, especially after March 31st, once the Fed is no longer buying Mortgage Backed Securities.

There are now just Two (2) Months remaining (i.e., February and March) in the Fed's program to purchase $1.25 trillion of mortgage backed securities. The program, which originally began in Fed purchases in March 2009, will stop by the end of next month. Eric Rosengren, the President of the Federal Reserve Bank of Boston, predicted last month that rates will rise by as much as .75% when the purchase program ends (source: Federal Reserve)