Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – July 15th, 2008

Higher Inflation Causing Higher Rates

Mortgage backed securities are about 71 basis points higher than last week.
That means that their yields went down and therefore interest rates.  So, last weeks advice to float was right on target.  You’d better have an itchy trigger finger on that lock button though…as this market is completely unpredictable and volatile. 

Iran shot off missiles this week capable of reaching Israel. 

This, not only is quite alarming and concerning, but creates a lot of uncertainty and instability to the market as well.  We’ll continue to watch this story closely and see how it affects oil prices, the market, and human beings in general. 

Right after I wrote this article, last week, mortgage backed securities moved upwardly above the 25-Day moving average.  Once it broke through that tough layer of resistance, the 25-Day trend line became a nice layer of support.  Then the very next day we broke through the 50-Day moving average.  Good news for rates.  The very next day, however, Initial Jobless Claims moved down by 58,000 to 346,000.  This is the lowest number since April and bonds reacted negatively with this labor market surprise. 

For the very first time in history, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke spoke to the House Financial Services Committee regarding ways to amend the current financial regulatory system to avoid future crises.  Mortgage Backed Securities moved up to the 200-Day moving average, but quickly bounced off of it.  This is an extremely stubborn level of resistance and locking at that high level was the best opportunity to lock this past week.  It was only back in September that we were able to move above this line very briefly.  

Government Take-Over of Fannie Mae & Freddie Mac?

Two big deals happened this past week that need mentioning.  First, FannieMae and FreddieMac have been threatened with a government controlled take over.  So, their stock prices tumbled 40%.  Second, IndyMac Bank was taken over by the FDIC and closed their doors.  Their customers got wind of a senators comments that they might need to be rescued and they flocked to the bank, withdrawing over $100 Million a day until FDIC had to rescue their depositors.  IndyMac Bank was a bank that specialized in “lite doc,” “no doc” loans and they, obviously, were hit hard by the credit crises.  We’ll keep a close eye on the Fannie/Freddie issue in the coming weeks.  This caused rates to increase. 

The next Monday, Treasury Secretary Paulson asked Congress for the ability to buy unlimited stakes in FannieMae and FreddieMac.  The Federal Reserve indicated that it would lend directly from the Central Bank to Fannie/Freddie to alleviate a collapse in confidence.  The Fed is asking Congress to increase the $2.25 Billion line of credit that these companies currently have.  This caused bond yields to increase again and play with the 200-Day and 100-Day moving averages.   

Investors Getting Concerned?

Tuesday saw investors somewhat weary of the Treasury’s plan and stock prices started to falter.  Generally, you’d see money go into bonds and mortgage backed securities, however, with the Producer Price Index showing wholesale inflation at 1.8% and the year-over-year PPI ending at 9.2% rates started to deteriorate. 

Next week we’ll inspect the FOMC minutes from their latest meeting.  It’s a crazy market out there.  You should be working with a serious professional watching your interest, with interest!  Until next week…