Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – Oct 14th, 2008

Catch-22 For Interest Rates

Unchartered Territory…Again

Last week I indicated that… “some experts think that the Fed might have a surprise lowering of our (overnight) rate by 50 basis points before the October 29th meeting.”  Also, I indicated that generally, that would be inflationary, however, with a coordinated effort of banks all over the world, lowering their benchmark rates too, “the value of the dollar would not be affected and rates might benefit from this.”  Well…rates haven’t benefited.  I did say also that, “we’re in unchartered territory.”  So, that’s my out!

So, the European Central Bank, Canada, the United Kingdom, Switzerland, and Sweden all lowered their Benchmark Overnight Rate.  This should have kept rates lower and should have not had an inflationary reaction since the value of the dollar would be in check.  Also, since the value of the dollar was increasing, and oil is traded in dollars, the price of oil came down…this should have helped interest rates too.  So I was right about the actions of the banks, just wrong about what the affect of those actions would be.  Unfortunately…there was no lowering of interest rates.

A Catch-22 for Interest Rates

The next day, Central Banks in Asia, followed suit.  What ended up happening here was a flight of investors, back into the stock market, which was at the expense of bonds, mortgage-backed securities, and therefore, interest rates.  We’re stuck in somewhat of a catch-22 scenario and interest rates are bearing the brunt.

The four-week average of Initial Jobless Claims moved to a seven year high.  But, as mentioned before, here’s some good news…oil is trading at about $82 per barrel.  Remember when I was writing about $100 dollars, then $147 in July?  So…at least we’re spending less at the pump!  Other good news was that two weeks ago I reported on the sharpest decline in the Dow Jones History…well…this last week we had the highest gain in the Dow Jones History…a 936 point increase.  That’s cool, but this volatility can be frightening.  We’ll just have to buckle down and try to be optimistic about the future.

Follow The Right Index

Once again we were experiencing opposite directions regarding the 10-Year Treasury and the yield on mortgage-backed securities.  I have spoken more often of this in the past year than any other year in history.  It’s important to note that many of my colleagues use the 10-Year Treasury Yield to follow interest rates and that is a dangerous path to follow.  For example, last week Treasuries were getting pummeled as people took money out of them and put them into the stock market.  However, Mortgage Bonds (or mortgage-backed securities) started to look a little more favorable to investors, as they tried to gain some momentum on the recent declining values of these bonds.  So again, some in the industry may have locked in an interest rate on the wrong day, by following the wrong index.

So, $250 Billion of the $700 Billion rescue plan (or whatever the final number ended up being) went to invest directly in our banking system.  So, the government will start buying stock in the biggest American Banks.  This will stabilize the marketplace, and it’s truly needed right now, but will be interesting to see how the government will get out of this habit in the future.  Banks just had too many loans compared to what capital they held.  The only way to offset this is to sell the loans at a discount or raise capital.  Hard to raise capital when nobody’s interested…so the government will step in.  There are incredible buying opportunities out there…get out and work with your favorite real estate agent and mortgage professional to see the safe haven real estate holds for the future.  It’s an excellent time to buy.  Until next week…

This entry was posted on Tuesday, October 14th, 2008 at 7:28 pm and is filed under Chico Home Loans, Home Buying, Interest Rates, Weekly Market Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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