Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – March 10, 2010

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.

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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!

Chico, CA Interest Rates Market Report – Economic Influences – Dec 2nd, 2008

Really?  We’re In a Recession?…

How do you like that?  It was officially announced, on Monday, that we’re currently in a recession and have been so since December of 2007.  Now, unless you work at Sierra Nevada Brewing Company, or read this article on a regular basis,  I don’t know how you wouldn’t know…

Last week I mentioned, “IF this all pans out, we may be seeing much lower interest rates in the few months ahead.  But with all of the other major concerns, it may be short lived.”  Well, Last Tuesday (one day after my article was written), we hit 5.125% (5.289% APR) for about two hours.  Rates were at their lowest of the year!

Don’t Toy With Rates

When you have good interest rates, it makes sense to preserve that rate for your clients.  Some people are waiting for pricing to get even lower and I strongly recommend taking advantage of opportunities when they knock.  For example, 5.5% (5.692% APR) is available exactly one week after the lows of the year and pricing, throughout the day, continues to get a little worse.

Let’s take a look at what happened.  First, Initial Jobless Claims came in at 529,000 moving the four-week average of continuing claims to 3.92 million.  This is a 25 year high, people.  Understand that there are a lot more workers today compared to 25 years ago.  But Come on!  25 years…I was a baby! The Fed’s favorite gauge on inflation, the Core Personal Consumption Expenditure Index oozed in at a year-over-year rate of 2.1%.  Nicely close to the 1.0% to 2.0% level the Fed likes to see.  Also, good for rates was China’s lowering of their benchmark rate over 108 basis points to 5.58%.  The most in 11 years!  Remember, when we lower our overnight, or benchmark rate, it’s generally inflationary ’cause the value of the dollar goes down, making it more expensive to produce items in a worldly economy.  However, if banks around the world are also lowering their rates, it gives us kind of a cushion to stave off inflation…and remember…inflation is the worst enemy of interest rates.

Good ‘Ole Ben Bernenke Speaks Out

The big mover was Ben Bernanke’s economic outlook speech to the Dallas Fed Conference and Henry Paulson’s update on the US economy.  Good ‘ole Ben Bernanke and “high rankin’ Hank” indicated that it’s possible that the Treasury would purchase agency debt.  Interest rates loved that news, and again, hit the lows of the year.  Then…late in the same day, interest rates took a U-turn to 90 basis points lower.  That’s a difference of 1.0% (almost) on the same loan rate just two hours later.  This was one of the craziest days in mortgage backed securities’ trading history!  Now, again, the 10-year Treasury note was up over 150 basis points.  Competitors that follow this index, instead of mortgage backed securities would have given you the wrong advice on when to lock in your loan.  This is another example of the two indices working uniquely differently than some economic analysts indicate.

Stocks Primed for a Rally

Here’s what I’m concerned about.  Generally stocks and bonds (interest rates) move in opposite directions.  So…if stocks are prepared for a major rally (which is quite possible with all of the loses that we’ve been experiencing) rates will suffer.  A big “however”, is this…December 9th there’s an announcement the may help the auto industry, the 16th there we may see another global rate cut and the Security and Exchange Commission may announce January 2nd, information that may rally stocks incredibly higher…stay tuned for all of this stuff!  The good news;  if all of this information helps investors feel better about US and world economies…home buying should pick up tremendously!

Now is the time…let’s get out there and buy.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – July 17th, 2007

Watching the Subprime Loan Situation?

Well, last week I had indicated that Good ‘ole Ben Bernanke would be speaking out and that I would report about his comments, and how the market reacted, this week.  Well, when Ben spoke, mortgage backed securities…didn’t even react…they were too busy watching the stock market…how’s that for anti-climactic? 

Something that we should be watching is this whole subprime loan situation.  I’m sure you’ve been reading about it lately.  Well, some bond rating services from Standard & Poor’s and Moody’s are considering, or may actually be in the process of, lowering the credit ratings of Mortgaged-Backed Securities.  When a large amount of A-Paper Loans are pooled together and offered for sale, they generally are accompanied by some subprime loans as well.  So the entire pool could potentially be contaminated and this could bring the pricing for Mortgage Bonds to a more risky level.  This could hurt interest rates, in the future. 

We’ve really been having a difficult time breaking through the 25-day moving average.  If fact, we continue to bounce off of that level of resistance, and the trend line keeps moving lower…so rates keep moving a little higher, as that trend line lowers (remember, when Mortgage Backed Securities move lower, their yield moves higher, causing interest rates to move higher). 

Wal-Mart Staying Strong

Last week, WalMart reported a much stronger than expected 2.4% increase in their sales for June of 2007.  In the pits, on Wall Street, there is a common saying, “As goes WalMart…so goes Retail.”  So rates moved up on speculation that Retail Sales will be strong (based on WalMart’s reports).  Again, speculation moving our markets…I keep talking about this…but a funny thing happened…Retail Sales plunged -0,9% in June.  This was the lowest level reported since August of 2005.  Over and above that, previous numbers for April and May were revised lower.  This was a big surprise for the markets and we enjoyed a little breathing room.  Interestingly, the University of Michigan’s Preliminary Consumer Sentiment Index for July was reported at 92.4.  Much higher than the 85.5 that was expected.  What this means is that consumers weren’t spending too much money in June, but they felt as though their financial outlook for the future looked promising.  Go figure…now that’s optimism, hey?  

Some great news regarding foreign investment in our bonds!!! 

$126 Billion was invested in US Securities, when we only expected $72 Billion of foreign assistance.  Remember that we have been watching this VERY closely, as foreign investment has really helped keep our long term rates lower.  So this was very good news to see. 

The Producer Price Index (PPI) for June, was reported at -0.2%, lower than expectations, but the Core PPI rose 0.3%.  This was not good for interest rates, but the bigger news will have to wait until next week issue, as print time is hounding me.  Also, I’ll have to wait to comment on Ben Bernanke’s semi-annual monetary policy report to the House of Representatives Financial Services Committee.  Then he speaks to the Senate Banking Committee.  It will be interesting to see how the financial markets will react to the question and answer event.  Let’s hope that Bernanke can keep his comments on inflation at a level that the markets can cope with.  I’d hate to have another anti-climactic article…Until next week