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Mortgage Bonds Trading Lower On Inflationary Pressure

Mortgage bonds are feeling more pressure today on the heels of comments by the Philadelphia Fed President.

Philadelphia Fed President Charlie Plosser stated today that “inflation is too high”.  Of course whenever the word “inflation” enters into the markets, bond traders sell.  He also added that the Fed must “back up their words with action”.  This is a clear indication that rate hikes in the near future are eminent, and the market seems to agree.

To re-cap – oil prices are based on the US Dollar.  With the lagging value of the dollar being at least one of the prevailing reasons for high prices, one way to help is to increase the value of the dollar.  Increasing the Fed Funds Rate and making money more difficult to borrow is a proven way to strengthen the dollar, and the trickle down affect could very likely lower the price of oil.

Of course, the flip side to this coin is the already struggling credit market where people have had difficulty already in borrowing money with rates where they are now.  While the short term solution may be to shore up the value of the dollar, the long term solution will be to lower our dependence on foreign oil.

For more on our dependance on foreign oil and how we may be able to change it, see my post on The Pickens Plan.

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