Markets bounce … Is that a light at the end of the tunnel ?

Though light trading volumes may be exaggerating movements and most pundits say a bear market that remains under way, there are some bright signs in the markets …  at least a short-term bounce, if not a turnaround.

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Excerpted from WSJ, “Suddenly, a Markets Turnaround”, Jan.  7, 2009

From junk bonds to currencies, mortgages, stocks and commodities, the markets that were most battered in the second half of 2008 are staging rebounds, sometimes of 10% and more from their low points.

The breather comes as the U.S. government continues to push investors toward taking more risk because the returns on risk-free assets like Treasury bonds are extremely low.

The Dow has gained 19.37% from its November low point, and the S&P 500 is up 24.22%.

Still, the fear has ebbed somewhat in the shell-shocked credit markets. Junk bonds have rebounded by over 11% from their low in December … and higher-quality corporate bonds have gained more than 4% amid an increasingly robust calendar of new offerings. Led by GE, at least $6.6 billion in new corporate bonds were offered Tuesday yielding investors well over 6%, compared with Treasury bonds, which yield between 0.1% and 3%.

The Fed has cut interest rates nearly to zero, and by June, the Fed plans to buy $500 billion, or nearly one-tenth of the entire $5 trillion market for good-quality bonds backed by mortgages that conform to standards set by Fannie Mae and Freddie Mac.  The hope is that by midyear the plan will have brought down mortgage rates and sparked enough refinancing that the housing market may bottom, which would give banks more leeway to lend money into the economy. Consumers have already been applying in droves to refinance their mortgages as the average 30-year fixed rate conforming mortgage hovers just over 5%.

The Fed’s buying, which would average out to about $4 billion a day, has already sent spreads in the mortgage market almost back to what traders call “normal.” Before the credit crisis took hold, the yield of an average agency-backed mortgage bond was 1.5 to 1.6 percentage points over comparable Treasury bonds.

After hitting 2.8 percentage points in late November, that spread finished Tuesday at 1.7 percentage points.

Still, many investors and market participants  are concerned about what happens when the Fed help  dries up.

“The government can make mortgages cost 3%, but they can’t improve anyone’s credit score”

Though major indexes’ gains from their November lows so far fit the traditional definition of a bull market, up 20%, few participants are interpreting them that way. Many say the market’s recent.


Full article: 

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