We've Broken Through Support

Treasury Auction Does Well

Yesterday’s Auction of 3-Year Treasuries Notes started off precariously.  By the end of the auction, though, it was quite well received and interest rates benefited, but only slightly.  Today, we have a huge $21 Billion in 10-Year Treasury Notes to be auctioned, and longer terms are harder to sell, as inflation factors can whittle down the value of that bond, over a longer 10-Year duration. 

Mutiny On The Policy

The List of Federal Reserve Board “Dissenters” is growing.  Remember Bernanke’s statements, last month, to keep interest rates low “for an extended period of time!”  Dallas Fed President Richard  Fisher, St. Louis Fed President James Bullard, Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans have all expressed their concern regarding the “extended period” of time.  Why?  Inflation!  The nemeses of interest rates!  This is alarming and could have an influence on the Carry-Trade.  You do NOT want to get caught up in a change in the carry trade.  It could cost an investment, millions!  The Fed’s in a tough position, right now, regarding when to move rates, so that we don’t experience too much inflation, too quickly.  Or moving them too quickly, and jeopardizing the economy and all the stimulus funds just submitted to Congress and The Senate, for approval.  I hope they don’t hold out too long…

Without Much Support...It's Time To Lock

Locking Advice

We’ve been in a lock mode for some time.  Even though yesterday’s auction fared well, we just don’t have much support to hold lower rates.  We’ve broken below the 100-Day Moving Average, so to climb back above it would take a lot of economic information that’s just not slated for release, this week.

Related Must Reads

The Real Jobs Numbers
Senate Approved Tax Credit Extension

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Careful Floating Into The Morning

Greece IV

It looks like the European Union (EU) will reluctantly bail out Greece.  The uncertainty, in Greece, has helped Mortgage-Backed Securities, as of late, however, the recent developments will definitely change the playing field, and put pressure on interest rates.  With no real economic reports, being released, until Thursday, we’ll have to watch the Stock Market and other technical factors to get a glimpse of where rates will head.

This Week’s Auctions

Tomorrow, $40 Billion in 3-Year Notes will be auctioned.  $21 Billion in 10-Year Notes followed by $13 Billion in 30-Year Notes will finish the week.

Careful Floating Into The Morning

Locking Advice

I like the idea of floating into the day and watching bonds, closely.  We may have to switch to a lock mode.  Earlier this morning, we were down 12 Basis Points, however, currently, we’re down 3.  Not too much movement, but enough to hold steady and see if rates and bond values can remain above the 100-Day Moving Average.

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Right on the Button!  We watched rates, yesterday, until the afternoon.  Gained 19 basis points…had a re-price for the better two times, for a total of .25% and Locked!  On a $200,000 loan that would save a client $500 in fees, to get into a loan.  Not to mention that it transitioned us into a lower interest rate, by .125%.  So, again, saving clients over $5,400 in monthly payments, through the life of a 30 year fixed rate loan.  That’s why we watch the market, so closely.  I LOVE saving clients money!

Unemployment Rate Holds Steady

The Labor Department reported that the U.S. Economy only lost 36,000 jobs, last month.  They expected well over 50,000 loses, however, the bigger surprise was that the unemployment rate held at 9.7%.  That was surprising, as there are so many claims for Emergency Unemployment Benefits.  So, we’ve dropped over 50 basis points, this morning.  That’s $1,000, on a $200,000 loan.  A lot of money, for a first time home buyer!

Turning To A Lock Mode

Locking Advice

I’d Lock

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We've Already Been Down This Morning...

Jobless Claims

The numbers rolled in at 469,000 new claims.  Wow!  But, that’s what the market was prepared for, go figure!  Continuing Claims were 146,000 lower than last month, but 5.7 Million people are claiming Emergency Unemployment Compensation, so, their numbers aren’t even calculated into the “government numbers,” being reported to monitor how the economy is truly doing…so, it sort of fakes out the market and media, into a false sense of security.  Maybe faking out Senator Bunning, too!

< 60 Days To Get Into Contract

Pending Home Sales were reported at a -7.6% reading for January.  That’s a little disapp0inting, considering we were expecting a 1.0% increase.  The National Association of Realtors contributed this loss to the horribly bad weather. Remember that 49 of the 50 States had snow one day, in January.  You’d think more buyers would be jumping off the fence, to receive the tax credit for home purchasing.  Remember, there’s more than one opportunity!  Think of it…you have less than 60 days to be get qualified for a loan, find an agent you’re comfortable with, look for houses, if you find the one you love…what if it’s a short sale, or a bank owned property that could take more than four weeks to get an answer from, go through the loan process and close by June 30, 2010, in order to receive your tax credit!  Fence sitters…get off your fence!

Good News on Job Front

Well, sort of good news.  Productivity rose by 6.9%, the fourth quarter of 2009.  This, compared to 6.2% the previous quarter.  For the  2009 year, Productivity rose by 3.8%.  Unit Labor Costs were slashed by 5.9%, the fourth quarter and 1.7% for the 2009 year.  So, with productiviy increasing, and labor costs decreasing, it’s generally a sign that businesses will start hiring.  However, be patient, as we’ve written before, businesses are getting a lot more out of the employee than they used to.  So, they’ll squeeze what they can, out of the employee, before adding on more costs and hiring.

Take Advantage Of Where We Are...Today

Locking Advice

So, Unemployment Numbers will be released tomorrow.  It should be depressing!  However, as I have been stating, there’s not much further bond values can rise (and therefore, lower interest rates).  We have the temporary hiring of the census bureau, we already have a market that expects an ugly number, so anything better than expectations can have a temporary effect on rates.  I think that the risks are too great, to not take advantage of today’s rates.  I’d wait for today’s best pricing, then I’d lock!

Related Must Reads

The Real Jobs Numbers
Senate Approved Tax Credit Extension

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We're Above Support Currently

ADP Reports Losses

American Data Processing, which is America’s largest payroll company, reported that we lost 20,000 jobs, in February.  That’s in the Private Sector alone.  The government, generally, hires workers, so that number could be skewed a bit, however, keep in mind that we’re currently having the census bureau hire many Americans to help take statistics all over the country.  That will have an effect on the jobs numbers, too. The revised jobs numbers, for January, were even more alarming.  They revised the 22,000 jobs lost, to a 60,000 jobs lost number.

Yesterday’s Losses

We were in a lock pattern, the last couple of days, and yesterday was a wild roller coaster ride.  We maneuvered below the 100-Day Moving Average, bounced off of the 25-Day Moving Average and ended the day, right where we started.  So, to avoid a heart-attack, locking was more relaxing.  Today, we’ve moved right back down to the 100-Day Moving Average, but so far, we’ve avoided piercing that level of support.

Obama’s Health Care Statement

President Obama is scheduled to talk, today, about the stale-mate that’s currently occurring with Senator Bunning’s consistent objections to the $10 Billion Obama Health Care Plan.  He may indicate that he will file to move ahead with a reconciliation plan that only needs 51 votes, as opposed to 60 votes, in the Senate, for approval.  Bonds may not like these statements, as the United States deficit will have to increase, in order to financial support a bill, like this one.

Signs Point To Floating...However...

Locking Advice

With the Jobs Numbers slated for Friday, this is a tough call.  We have support, at the 100-Day Moving Average, and it’s going to be tough to break through the highs (or lows, for interest rates) of the last six months, so, I would lock.  Even though things could get better, it’s only a chance, and if they do get better, I think it will be for a short time, as investors will realize this, and cash in on their earnings.

Related Must Reads

ADP is O-F-F: A History of Non-Reliable Information
How Moving Averages Effect Interest Rates

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Greece's Assurance Of A Resolution Stopped The "Flight To Quality"

Greece’s Resolution

There’s no real economic data scheduled to appear, this morning.  So, the market is moving, primarily from news that their is a financial resolution to Greece’s problems. Basically, they are having to increase taxes, cut government workers’ wages, and other ideas, to help lower their huge deficit.  One suggestion, taken seriously, is requiring taxi drivers to issue receipts, so that they pay their fair share of taxes.  This has caused a nationwide strike and put a huge damper on tourism.  So, you can see how everyone understands that there are sacrifices that need to be taken to rescue and failing economy, it’s just that nobody wants to pay for them.

We've Bounced Below The 100-Day Moving Average

Locking Advice

Just as anticipated, yesterday, we hit a level that we just couldn’t do much with.  We’d reached the pinnacle of where we could go, without some sort of news that could catapult rates where we haven’t seen in quite some time.  And, actually, we got the news, from Greece, which helped take the “flight to quality” from US Treasuries, back into Stocks, causing rates to increase, slightly.

Related Must Reads

Greece’s Financial Problems

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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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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!

4th Quarter GDP Excites

Dissecting The GDP

A ton of economic information to report on, this morning.  First of all, the 4th Quarter Gross Domestic Product grew at a whopping 5.9%. The Best GDP reading in over six years!  You’d think that Stocks would surge and interest rates would move up on the great economic news. However, let’s dissect this figure.  The gains are primarily due to businesses re-stocking their shelves, after the government “Cash for Clunkers” Program and NOT buying during the late 2008 and 2009 seasons, due to the recession.  Also, when you measure consumer spending (the most important component of GDP), we had a measly 1.7% growth.  Not so whopping!

Existing Home Sales

January’s Existing Home Sales were expected to be at 5.5 Million Units.  Unfortunately, the number attained was 5.05 Million.  Inventory of unsold homes moved to 7.8 months.  Weather, back east, probably had a lot to due with this number.  These numbers are not as promising as we’d hoped, and shows that we’re still trying to maneuver out of this slump.

The Chicago Purchasing Managers Index (PMI) and Consumer Sentiment, both came in at expectations.

Where’d All The $ Go?

This last week, the government purchased purchased $11 Billion in Mortgage-Backed Securities.  So, there’s only $44 Billion left, in the Government’s $1.25 Trillion Mortgage-Backed Security Purchase Program.  Wow!  That’s alarming!

Locking Advice

We're Still Floatin'

Poor economic activity reduces demand for capital causing Stocks to lower, which causes Bonds to rise, which, in turn, causes a reduction in interest rates.  If this structure continues, the goods news is that mortgage interest rates would probably move lower.  Unfortunately, the bad news is that this could have a very negative effect on the job market.  Which in turn has a negative effect on the housing market.

Related Must Reads

Advanced GDP Hot! An October Take On GDP
More Jobs – Better Housing
The Effect of $1.25 Trillion…Gone

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Greece Could Cause Domino Effect

Greece III

I would imagine that a Greece III Movie might have this subtitle:  Worse than Greece II, Which Was Worse Than, Perhaps, Joe Dirt. Moody’s and Standard & Poor’s, is considering lowering Greece’s bond rating to kind of a Joe Dirt, status.  This is alarming because any financial institution that holds any Greek debt, will find their capital values plummet, causing their reserve requirements to be in jeopardy.  So, it effects the world, not just Greece.  Germany and France are the largest holder of Greek debt, however, remember the mortgage credit crisis? Remember how experts, sort of, shrugged off any concerns, before the hammer fell?

Sound Familiar?

Germany and France have their own financial troubles to worry about.  So, this problem is Greece exponential.  German Chancellor Angela Merkel stated that the Euro is…”in a difficult situation…for the first time since its introduction…but it will come through.”  Agreed, however, who will be effected?  Spain, Ireland, Portugal, and other European Nations are all in financial trouble.  Let’s hope they’re not heading down the same road, as Greece.

Initial Jobless Claims

500,000 people filed claims for unemployment benefits.  This is horrible!  It’s also closer to the reality that I’ve been talking about.  I hate being pessimistic, but I, also, appreciate truth.  And, the truth is…things are ugly!

Locking Advice

Back To Float Mode

With the Initial Jobless Claims and Greece’s finances throwing the Stock Market into a tailspin, it’s time to float, again.

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