The beginning of the end?

On April 30, bond fund king Bill Gross of Pimco Co. said he believed that the bull run in bonds had come to an end along with the low interest rates that have propelled it. Judging by how high rates have come up since those comments you would think that the market was listening to his every word.

During the last two weeks of May and into the first week of June, mortgage rates moved up from 3.375 percent on a 30 year fixed to 4.25 percent. That is a pretty dramatic increase in such a short period of time.

The rise was fueled by speculation that the Federal Reserve will taper back its bond buying from its current level of $85 billion per month. In addition to nudging rates higher, the move would also put the brakes on a red-hot stock market that has been hitting new highs and keeps on going higher.

The current increase in the stock market has left many feeling the wealth effect (when you feel wealthier, you spend more), with real estate prices and transactions picking up and increased consumer confidence leading to increases in retail sales.

In my opinion, all this talk of good times to come has been a bit premature. We still have a very fragile economy, the fiscal problems in Europe have not gone away, and with rising home prices and rising rates, we are sure to price some buyer out of qualifying for a loan.

The Fed I’m sure is concerned about creating another bubble in the stock market so they are doing everything they can to talk rates down and to keep the stock market from going up too far, too fast. Time will tell what new challenges we will face.

For more, call 773-557-1000 ext. 15, e-mail ron@ronmortgage.com or visit www.ronmortgage.com.