My Mortgage Blog

"This is the Ben and Janet show!" So wrote advisor David Zervos to his nervous clients (at the investment bank Jeffries) not many days ago. Ben, of course, is Ben Bernanke, and Janet is Janet Yellen, Federal Reserve Vice Chairwoman.

The subject at hand could be summed up in the words, "If not now, when?" When is the Fed going to start withdrawing its support for low interest rates, and will we know when the time comes? The reference to Ben and Janet subtly recalls that they have consistently promised not to pull the rug out from beneath the credit market's feet, as arguably happened when it was the Paul (Volcker) or Alan (Greenspan) show and rates were made to rise quickly in order to cut off rising inflation. In Volcker's case, we faced 18% mortgage rates as a result and the market came to a screeching halt.

As David Wessel and Victoria McGrane wrote in the Friday Wall Street Journal, "Few doubt that over the next several years, long-term rates will rise closer to the 4% or 5% level if the economy continues its gradual recovery. The question is when."

The thorn in the side of this argument is Bill Gross, co-chief investment officer at Pimco, who asserts that "the secular 30-year bull market in bonds likely ended 4/29/2013." In other words, the end isn't nigh, it's already upon us.

Assigning an exact date is somewhat beside the point. The point is that those who agree with Gross's view that the long-term bond market is already in the process of turning, are nervous about the damage that rising bond prices could bring, not only to their own portfolios but also to the overall market.

The argument is somewhat compelling. If you study the movement of the average 30-year Freddie Mac fixed mortgage rate from the early 1980s to the present, you see a 30-year period in which the underlying trend for those rates was down, and you can't help but notice that there isn't much further down that mortgage rates can go unless lenders lose their interest in make a profit.

If we're at the conclusion of a 30-year cycle in which rates moved generally in a southerly direction, perhaps it makes sense to anticipate a new 30-year cycle in which rates move generally in a northerly direction. There's a certain mathematical elegance to that.

But there's no obvious foundation in history, or even in sight. Why 30 years? Why a steady move upward (broken occasionally when the markets falter)?

It's probably not going to happen that neatly, but there are suggestions in the air that should be taken seriously.

First, rates are indeed very likely to rise, and quite possibly soon. The Fed is already mumbling about the labor markets having recovered almost enough for the Fed to stop manipulating the credit markets so intensely. Second, a change in Fed policy might send a frightened shriek through the credit markets (which is a reason that the Fed will continue to try to do this gracefully). That could take rates higher in a hurry. And third, because the credit markets are moved so authoritatively by the 10-year and 30-year securities, a major change in their value might mean that interest rates rearrange themselves around the new reality. Things could be chaotic for a time, somewhat like a real estate market that doesn't know how to establish the market value of its homes accurately and is forced to guess.

Indeed, the shifting credit markets could emerge looking rather different than they did when rates were continuing to fall, rather than beginning to rise. New investments would most likely be developed and old ones might fall by the wayside.

Honestly, it doesn't sound like a ton of fun, and we can understand the many investors who have already made defensive moves out of bonds and bond funds. Note, though, that bonds and bond funds are still hot sellers in the investment markets.

It will be worth looking for signs that the support of low rates is ebbing, though. And almost certainly worth taking advantage of today's low rates in the meantime.