Meet the Street: The Fed's Comments Matter as Much as a Rate Cut

Kent Weber, Portfolio Manager, Advantus Mortgage Securities

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Ahead of Tuesday's Federal Open Market Committee meeting, many consumers are wondering what another cut in the fed funds rate could mean for them. Has the window of opportunity for mortgage refinancing closed? And for fixed-income investors, how will the yields of Treasury notes compare, going forward, to the yields of other sorts of instruments, like corporate bonds and mortgage-backed securities?

Daily Interview spoke with Kent Weber, portfolio manager at (ADMSX Quote)Advantus Mortgage Securities fund, to explore these issues.

TSC: What do you think the fed funds rate will do tomorrow?

Weber: I think there is a better than 50/50 probability that the fed funds rate will be cut by 0.25%. I think the Fed will pull the trigger and drop the rate to 1.75%. Then the debate will be: Are they done or will they cut rates further?

The commentary that comes with the cut will be as important as the cut itself. The cuts that have come fast and frequently over the last 12 months have been accompanied by a standard policy statement that says the risk is to the downside and further weakening in the economy. I think the bond market has a different opinion, given the substantial backup that we've seen in the market.

It really looks as if the market is decoupling. There is a disconnect between the Fed's actions and their effects on the short-term part of the Treasury curve . Those rates are decoupling. The rates on the front side probably will stay quite low.

TSC: What do you mean by "decoupling"?

Weber: Since Sept. 11, we've basically taken out a flight-to-quality trade -- a terrorist trade -- and the bond market is seeing higher interest rates today than it did before the hideous terrorist attacks.

But at the same time, the Treasuries, fed funds' one-year class of interest rates, continue to hold their own, if not drop. For example, the 10-year Treasury bond is actually 25 basis points higher today than it was at the beginning of the year. But the six-month Treasury bill is 400 basis points less than it was at the beginning of the year. ...