Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – June 12th, 2007

Less Foreign Interest Is Frightening

Foreign Interest in US Bonds

In May 3^rd’s issue of Chico’s News and Review’s Market Outlook I discussed the concern of the foreign market’s interest in American Bonds.  I said, “Foreign interest in Treasury Notes have really helped keep interest rates low over the past years, however, foreign investment has been lacking lately.  This could really hurt rates, in the future, so we’re watching foreign interest very closely.”

In May 17^th’s issue of Chico’s News and Review’s Market Outlook I mentioned that we did not expect to, however, if we did break below the 200-day moving average, “…we could see higher rates and a difficult time breaking back above that 200-day moving average.”  At that time, we were locking in interest rates of around 6.0%.  Today, the market demands rates of approximately 6.75% for the same cost.  

On Wednesday, June 5, The European Central Bank (ECB) for thirteen European Countries increased their overnight rate by .25% to 4.0%.  The ECB is Europe’s version of our Federal Reserve.  They also are expected to continue increasing their rate over the next year to levels of 5.0% due to their continuing economic growth and concern for inflation.  So…global investors have an opportunity to move their money from our bonds to Europe’s bonds as Europe’s become more desirable to foreign investors in search of higher yields. 

Thursday, June 7^th was a nightmare!  New Zealand’s Central Bank did the same thing that the ECU did.  They increased their overnight rate, but this was a complete surprise.  So, not only were foreign investor’s lured from the US to maybe “closer to home” investments in Europe, but now the possibility of “closer to home” investments in New Zealand became a reality, causing our bonds to plummet downwardly 91 basis points on the day.  Remember, bond values (or mortgage backed securities) moving down means that interest rates are moving up.  91 Basis points basically boils down to a .875% cost in points to buy the same interest rate.  So a zero point loan on Wednesday could cost you .875% points for the same interest rate on Thursday.  That’s almost a full point! 

It was the worst single day loss in over three years. 

Then, later that same day, Australia was talking about doing the same thing, to curb their hot market and luring inflation concerns. 

So, Friday, June 8^th comes around and we lose another 44 basis points, but bonds tried to rally and finished the day about where they started…WOW!

So thank God for last weekend.  It was the only time rates weren’t skyrocketing!  This week started out as badly as last…Japan’s economy is growing rapidly as well.  Japan has more foreign investors in US Bonds than any other country.  Coupled with the fact that the dollar is losing value compared to the Japanese Yen, this puts more pressure on US bonds.

On Tuesday, June 12, China and Japan were talking about pulling out of US Bonds. 

Then at 1 PM ET, $8 Billion of 10-Year US Treasury Notes were auctioned off…with almost NO foreign investment interest…sending mortgage backed securities down, down, down another 61 basis points. 

Hopefully, Tuesday will be the bottom of the barrel, so to speak, and mortgage backed securities will recover…Until next week…