Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – March 1, 2010

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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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 – February 25, 2010

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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Chico, CA Interest Rates Market Report – Economic Influences – February 24, 2010

Inflation Back In Check

Chicago was a blast!  But let’s get caught up on what you missed!  Last Post, I was discussing inflation, at the wholesale level.   The report for the consumer level was much tamer than anticipated.  The Consumer Price Index (CPI) came in at a comfortable 0.2%.  Lower than the 0.3% expected.  And the Core CPI came in at a cool 0.1%, when an actual increase of 0.1% was expected.  This helped cool the massive upward trend in rates that we observed on the 17th and 18th of February.

Discount Rate Increases

As anticipated in last weeks article, the Fed increased the discount rate from 0.5% to 0.75%. This should not hurt businesses and the consumer, but help financial institutions return to a somewhat state of normalcy, regarding the spread between the discount rate, and the Fed Funds Rate.

The National Association for Business Economics

The (NABE) reported that they anticipate approximately 103,000 new jobs created from April through the end of this year.  Now that’s just in line with The White Houses assessment of adding 95,000 per month.  However, keep in mind that with population growth and immigration, alone, we need to add more than this, to reach the 6.0% Unemployment Rate that The White House has predicted to reach in five years.  So, while the news is somewhat encouraging, particularly to the media, it’s not so encouraging to me.

Eenie-Meenie-Miney-Moe

Catch a Country’s Financial Woes…Okay, so let’s choose a country…any country…England!  No, how about Spain!  Okay, How about Greece…Japan or China?  Here’s my point.  Bank of England Governor Mervyn King indicated that England is ready to extend its asset purchase program, to enable banks to lend more money, to help their fragile economy.  Spain’s economy could potentially be worse.  There’s concern that their spending for their social programs is spiraling out of control.  If it doesn’t curb, substantially, than the effect on the entire Euro-community could be devastating.  De-valuing the Euro and creating an uncanny value of the Dollar.  Which could, actually, hurt the United States.  We’re not out of this mess, yet, my friends!

“Yellen” Up The Wrong Tree?

San Francisco Fed President Janet Yellen indicated that she’s not concerned with inflation and that the economy is moving too sluggishly for inflation to be a concern, at the moment.  Now, this is scary!  We’re walkin’ a fine line, here!  Inflation should always be a concern to a Fed President…but if we’re not adding jobs, what is one to do?  We’re not out of this mess, yet, my friends!

Consumer Confidence Bums

So the consumer, apparently, is not listening to the media.  All of the hype about jobs, and growth, and the economy on recovery did not have an effect on the consumer, as consumer confidence reported a weak showing at 46.0, when a 55.0 number was expected.

Good ‘Ole Ben Bernanke

He’s speaking before Congress’ House Financial Services Committee today.  Tomorrow he’ll talk before the US Senate’s Banking Committee!  He’s indicating that he feels as though inflation is in check!  And that it will continue to be so for quite some time.  He also reiterated that ‘ole “extended period” quote. Bringing some level of satisfaction to investors around the world.  Keep in mind, that he’s gotta sell some of our debt.  The best way to do that is to sell Bonds and Mortgage-Backed Securities, to the world.  Think he’s baitin’ the world?  It will be interesting to see.  His comments on inflation are quite interesting, however, keep in mind, if he indicated that inflation was a concern, investors would run!

Locking Advice

My guess is that late yesterday, and early this morning, will be the best times to lock. Although, hearing Bernanke’s testimony this morning may bring bidders to the auction table today.  That could change things, but not too drastically.  We locked in our clients this morning, on applications taken yesterday.

Related Must Reads

Greece Two
Japan’s FICO And China’s Tightening Credit
Hints Into Higher Rates
Why The Spread Was Lowered Initially, And Why It’s Okay To Go Back

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