Danny Salas

Archive for March 1st, 2010

Chico, CA Interest Rates Market Report – Economic Influences – March 1, 2010

We're Sitting Above Support Lines For Low Rates

So…It’s March

What’s so significant about March?  Here’s the quick and easy…Interest Rates!  I have many people asking me where I think rates will go, and when.  Well, with the Government’s Mortgage-Backed Security Purchase Program ending this month, the easy answer is, “up.”  Whenever a large player exits the market, there are consequences, and the market reacts.  So, if the government, or a huge player, is leaving, where do we go, but into negative territory!  And even though we have had some interesting market movers, that have brought rates into a lower arena, we’re still averaging approximately 0.25% to 0.375% higher in rates, from just a few months ago.

Government’s MBS “Selling” Program

Just last month, the Fed indicated that they are going to start looking into selling Mortgage-Backed Securities.  So, The Fed will have $1.25 Trillion in Mortgage-Backed Securities, $777 Billion in Treasuries, and $166 Billion in agency debt to settle.  Let alone, they’ll still be auctioning off new Treasuries every two weeks.  So, the only way to attract buyers would be to increase their rate of return, and that translates to higher interest rates.

Temporary Fixes

As mentioned above (regarding market movers), we’ve had some surprises regarding interest rates, however, these are temporary. Greece will find some sort of solution to their financial woes, and when they do, money will pour out of American investments.  The Government Mortgage-Backed Security Purchase Program is unwinding, and the Carry Trade will, also, be coming to an end, shortly.  All signs to higher rates.

Fed’s Favorite Gauge On Inflation

The Core Personal Consumption Expenditure Index (PCI) came in at a year-over-year reading of 1.4%.  This is well within the Fed’s guide and comfort level of 1.0-2.0%.  So, another reading on inflation is good for interest rates.

I Know, We're In Safe Territory, But I'd Lock!

Locking Advice

While we sit at a comfortable level, just above all levels of support, if you don’t like risk, LOCK! However, keep in mind that we ARE sitting above these lines of support.  Especially the 100-Day Moving Average.  If we can manage to stay above this line, then floating, until we see some form of economic data to move us under this line, is risky, but potentially beneficial.  So, we have support, but if you don’t have a finger on the lock button, than don’t risk all of our more recent gains in value, and therefore, lower rates.

Related Must Reads

Why Market Movers Are Temporary
The Carry Trade Phenom

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Carry Trade…The Investment Opportunity of a Lifetime…

Loss of The Carry Trade...Why Rates Will Go Up This Year

More Writing On The Wall

So, we’ve been talking about interest rates, inevitably, moving up; that the writing’s on the wall.  What are some of the writings on the wall, and how do we know?  We’ve talked about the Government’s Mortgage-Backed Security Purchase Program drying up in March.  We’ve talked about some of the financial troubles occruing in Greece, and throughout the world;  that the safe-haven for US Treasuries and Mortgage-Backed Securities will eventually reverse.  But what’s the Carry Trade?  How does it work, and how will it effect rates?

The Fed Funds Rate

So, remember that the Fed Funds Rate has been significanly lower, for quite some time.  The Fed increased the Discount Rate, however, has been mentioning that the Fed Funds Rate will remain low, “for an extended period,” of time.  This “extended period” quote was lost, at a more recent meeting.  However, Good ‘Ole Ben Bernanke brought it up again, with his talk to Congress and the Senate, last week.  Why is this back and forth mentioning of “extended period” so important?

The Writing On The Wall

The Fed’s not in the business of tricking people.  They’re significantly more transparent than that!  They want you to get the writing on the wall comments.  Here’s what’s being said:  We’ve mentioned Kansas City Fed President Thomas Hoenig, recently.  ”Fiscal policy is on an unsustainable course…”  Also, the Fed’s own Vice Chairman, Donald Kohn, has recently dissented from the Fed’s Policy, actually warning banks to be prepared for interest rate changes.

The Carry Trade Phenomenon

Think of it like this…You have $1 Million to invest and you’re interested in the 4.5% Mortgage Backed Security (which is currently being used to measure 30 Year Fixed Rate Mortgages).  4.5% on $1 Million is $45,000.  The Government Allows you to only put 10% Down on your investment.  So you only have to write a check for $100,000.  So, you can borrow the other $900,000 at the current Fed Funds Rate, plus .25%.  That equates to 2.25% or $20,250.  So, $45,000 minus $20,250 is a profit of $24,750.  Or a 24.75% return on your investment.  Now, when the Fed Funds Rate Increases…even just 0.5%, think of this;  your profit is significantly jeopardized.  That 1/2 percent alone can cost you $27,000 cost, from $45,000 earnings, is only a profit of $18,000.  So your rate of return is leveraged down to an 18% gain.  Still significant, however, quite a loss, for just 0.5% in rate increases.

Come On People, Now…

So, with the MBS Purchase Program ending, dissenting Fed Members and Presidents warning of higher rates, Greece on the Path to a financial rescue, I just don’t see how much writing can be on the wall, before everyone understands that rates are moving up.  The temporary fixes WILL NOT LAST!