We don’t think so.  Mortgage investors are taking a little breather today – after the massive rally yesterday when the Fed cut benchmark interest rates as low as zero and said it would use all available means to revive the economy.

Central bankers’ assertion that they are willing to keep interest rates low for an extended period of time and that they plan to buy more debt issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac fueled yesterday’s massive rally in the mortgage market.  We think it is worth noting that so far the Fed has done little more than “jaw-bone” mortgage rates lower.  Of the $600 billion authorized back in November to be used by the Fed to support housing and the mortgage market – central bankers have so far only spent $8 billion.

Our bet is the Fed only intends to spend their available capital to support interest rates – rather than lead them lower. In a free and open market it would be difficult for the government to target and sustain mortgage interest rates at a certain level. Markets are dominated by the golden rule – “He who has the gold makes the rules”. The mortgage market is far too large and trading action far too dynamic for any one investor to dominate for a sustained period of time – even an investor with $500 billion to spend.  We expect to see the Fed acting to mute heavy selling (an event that if left unchecked tends to push rates higher) rather than directly attempting to lead mortgage interest rates lower. If our assessment is accurate – mortgage interest rates will seek their own level as they have always done – they just won’t move higher at quite as brisk a pace as normal – at least until the Fed has depleted their war chest.

We are watching trading action in the stock markets closely — and we think you should do the same. Yields on Treasury obligations have now fallen to such a point that investors may find it necessary, especially in the New Year, to increase their risk tolerance in order to generate a positive rate-of-return on their capital. When the perception starts to take root that stimulative moves by the Fed and the government will eventually lift the economy out of a recession, investors the world over will begin aggressively selling Treasuries as they look for higher returns elsewhere – particularly in the stock markets. Our technical analysis work currently suggests a strong likelihood this prominent market condition will develop in earnest between mid-January and early February 2009.