At the end of March the Federal Reserve is going to stop buying FNMA & FHLMC paper. Absent other macroeconomic forces this will probably cause mortgage rates to go up about 0.5%. No one really knows but that is my best guess - I mean "estimate". The market will take a few months to establish itself and we will have annoyingly high volatility (day to day variation is rates/prices).

While there is a lot of money out there to invest the underlying concern which no one is talking about enough is the age old enemy of fixed income securities - inflation. It is difficult to believe that massive deficits, loose monetary policy and continued support of housing market will not cause serious inflation.

Se we have 1) the Fed exiting the market for GSE paper 2) underlying fear of inflation as a result of monetary policy and fiscal irresponsibility 3) the Fed starting to talk about raising rates. Do the math.

I believe that we may well be looking at several years of high inflation (I will define that as core-CPI >6%) and mortgage rates higher than at any time in the past 10 years. This is not going to happen immediately but may well start within a year.

Here is link to the this weeks testimony from Federal Reserve:

http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm

Debt Weakens U.S. Hand on China

 

Democratic Sen. Evan Bayh Sounds Alarm on Debt and Dependency  

 

Bayh worries  that the United States would suffer if China's central bank suddenly decided to stop lending America money.

Without the transfer of money from high-saving China to the low-saving United States, America would suffer a credit crunch; interest rates would increase, choking off residential and industrial investment.

To illustrate the risks the United States faces from its indebtedness to Asian central banks, Bayh points to the way the U.S. dollar began to go into a "free fall" last year when Japan's prime minister suggested that it might be time for Japan to start diversifying its dollar-denominated assets.

In a Senate floor speech timed with his decision to put the nomination of Rob Portman as U.S. trade representative on hold last year, Bayh said, "It is not a sign of strength, it is not a sign of independence, it is not a sign of security when something as fundamental as the value of our money can be undermined by a slip of the tongue or a premeditated statement or a rumor sweeping a foreign capital."

"That is not the sign of a great nation," the Indiana Democrat continued, "It is the sign of dependency, of weakness."  

Link to entire story:

http://abcnews.go.com/Politics/International/story?id=1867118&page=2