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How the Bond Markets React 03.29.05
Inflation Moves Markets
Or at least the talk of inflation does. When the word crept into the concerns of the F.O.M.C. message last week, the markets, both fixed income and equity, found themselves in a precarious spot. They were over priced. Jittery investors sold their holdings. In bonds, this pushed the price lower while moving the yield higher.
That sell-off began the inevitable call for a bear market in bonds. (I wrote about this last week.) The real question this week was how long would it last.
The moves made by Greenspan and company last week were entirely based on the risk of inflation which will lead to continued tightening by the Fed. If inflation accelerates, the Fed may tighten faster and harder than the previous 25 basis points or a quarter percentage point that they have over the last seven meetings.
Rather than try to predict how high the Fed will go, and many expect 4% by year end, it is more important to take notice of the rising cost of home borrowing. Much of what Greenspan considers wealth in this country is based on the value of homes. Should interest rates on a 30 year loan settle in at 6% or higher, the Fed will need to reconsider how it benchmarks its moves.
But one of the more important considerations is how to keep your money active. A term that may be foreign to many bond fund investors is laddering. To fully understand how this works, visit this explanation of using a ladder to invest first published here in 2003.
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