Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – August 21st, 2007

Global Crises Brewing?

Foreign Interest in US Bonds Secure…For The Moment

Well, did you guess correctly, as to where you thought interest rates were going?  Last week I let you make the call.  As, we are in unchartered waters, regarding the real estate and interest rate market.  Even though the Consumer Price Index (CPI) for July matched expectations and the Core CPI which takes out energy and food prices also matching expectations, and low gas prices spurring a decrease in inflationary pressures, we should have seen bonds move nicely upwardly, but they barely moved on that information.  This is really important:  Net Foreign Purchases of US Securities for June were $121 Billion.   This shows us that the foreign market is still interested in our bonds.  If this continues, it will help long term interest rates. 

Housing Starts was reported at an annual rate of 1.381 million.  This was below expectations as well as new building permits.  The initial jobless claims was the highest level seen since June 16 and this is the third week in a row that we’ve seen higher than expected jobless claims.  A sign that the labor market is loosening up and waged based inflation may become under control.  This would also help interest rates, as inflation is interest rates worst enemy.

Don’t Follow The 10-Year Treasury

Also very interesting to note:  Most mortgage professionals will follow the 10-Year Treasury Note Yield (T-Bill) to find out if interest rates are moving upwardly, or downwardly.  A COSTLY mistake!!!  On Thursday, August 16, Mortgage Bonds were trading at 25 basis points lower than when they opened.  Lower values mean higher yields, or higher interest rates.  So following Bonds, you’d see that it may be prudent to lock in a borrower.  However, the 10-year Note was trading 62 basis points higher then when trading opened.  Higher cost means lower yields, so someone following the 10-Year Treasury note would THINK that rates should be getting lower…but that’s simply not the case.  Mortgage interest rates follow (as it seems obvious) Mortgage Backed Securities. 

FED Lowers DISCOUNT RATE

We had a nice surprise to help this credit crisis that we’ve been experiencing as of late.  The Federal Reserve lowered their Discount Rate by .50% to 5.75%.  The Discount Rate is the rate by which the Fed lends money directly to commercial banks, credit unions, and savings and loans.  It’s different than the Fed Funds Rate that I generally write about.  By lowering this rate, banks have the opportunity to borrower at lower rates, enabling them to free up funds to close more loans.  Also, instead of letting banks borrow over night, they are extending the borrowing period for thirty days.  Again, very interesting.  This enables banks to be able to position their loans and hope that investors start feeling better about purchasing these loans in the secondary market. 

Global Crash?

Recently, there is concern over a German banking crisis.  Also, it’s rumored that a British Insurance company had to borrow funds from the Bank of England to be able to fund loans.  This is a global situation people.  It’s truly something that you should be reading about every day.  Remember when I mentioned that a Senator had suggested that we increase the conforming loan limits from $417,000 to a higher figure?  As of Tuesday, Ben Bernanke was meeting with Power’s that Be to see if that’s exactly what Congress and the Senate should do…help banks have the backing of the federal government to buy more loans to help with this current liquidity crisis.  We’ll have to wait and see what happened in next week’s article…until then…

Chico, CA Interest Rates Market Report – Economic Influences – May 14th, 2007

Horrible Retail Sales brought rates down

The Fed’s Interest Rate Decision and Policy Statement…

…was released on Wednesday, and as expected, the Fed did nothing to the overnight rate.  You’d think I would be elated.  You might wonder if interest rates moved below six percent for no points.  Unfortunately, the “tone” of the meeting wasn’t as positive as the decision itself. 

Good ‘ole Ben Bernanke and his bond-buying buddies believe wage-based inflation better be controllable before bonds aren’t bought in favor of better bets with stocks (huh?).

That being bellowed…The market reacted negatively, because it was looking for inflation to be commented on favorably by the statement.  Even though recent data from wage information and inflation has been relatively friendly, and the economy is slowing somewhat, the Fed is mostly concerned that inflation will, “fail to moderate as expected.”  So even though the Fed admitted that they “expect” inflation to moderate, their concern is that it won’t.  How’s that for the power of one’s words having an effect on not only our nation, but the world! 

Retail Sales were at their worst level in seven months. 

These are sales for everyday items like clothing, cars, etc.  One reason is undoubtedly the price of gasoline.  When the price of gas goes up, expect that price of everything else to go up with it.  Over and above that we had a really cold winter.  Remember last month I talked about people finding it difficult to go out and buy a home in the cold weather, well that cold weather froze crops.  Also, many corn products are being converted to other fuels, which is causing a shortage of corn which increases its value.  

By the time you read this article the oh-so-important Core Consumer Price Index will have been released.  With all of the past inflation information showing that inflation is moderating we hope to see a favorable number.  The 200-day moving average has been a HUGE level of support for mortgage-backed securities, so it would really have to be a surprise on Tuesday to break through that trend-line.  But if it is bad news we could see higher rates and a difficult time breaking back above that 200-day moving average.  

Also, housing information is expected on Wednesday with the release of Housing Starts and Building Permits.  As the weather warms over the nation, these figures should start looking more favorable.  It’s an exciting time for interest rates.  I hope that next week we’ll be talking about inflation looking in total control and bonds breaking above the 25, 50, and 100-day moving averages to bring a trend of lower interest rates.  Until next week…