Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – August 26, 2009

Surprise, Surpise: 2-Year Auction Bids Well

Here’s The Scoop

Yesterday, I expected difficulty with the Treasury Department auctioning $42 Billion in two-year notes.  We expected that our Government would have to stand up and do the borrowing to purchase all, or most of those investments, for a couple of reasons.  First, foreign appetite for our bonds has been relatively bleak, requiring Uncle Sam to purchase these bonds.  While that’s what our leaders have positioned the stimulus funds for, it still will, eventually, cause inflation (interest rate’s worst enemy).  Second, the announcement of rising home prices and rising consumer confidence should have told investors to stay away from the lower yielding bond market and put money in stocks, hurting rates.

What Happened?

Instead, Mortgage-Backed Securities reacted differently.  Foreign investors, including their central banks, participated in 49.4% of those shares.  What a wonderful surprise!  Careful, though, because two-year bonds are a short investment, and therefore, less risky than the two remaining auctions left, this week.

Why Be Leery of Yesterday’s Auction Success…

The longer your bond investment length, the more risky that investment.  Longer investment periods run the risk of higher inflation, in the future.  If there is high inflation, that subtracts from the fixed income the investor is receiving on their asset (investment).  So, the longer you hold the investment, the riskier that investment.  If you have to sell the bond, in two years, you have an opportunity to make some interest, and receive your initial investment back again.  If that span is longer than two years, than if inflation hits…you might have to sell at a discount, or if you wait for the maturity of the investment (who’s going to buy it if the investor’s selling it?), you’ll have to suffer the consequences and take a huge loss.  Very risky!  In order for foreign markets to accept longer terms, at the rest of the week’s auctions, the rate of return better be higher, which means higher rates, potentially. 

Economic Factors

Durable Goods Orders were reported at and increase of 4.9%, when the government had prepared for 3.2%.  Factored into the equation was aircraft orders. When subtracting the transportation information the staistic leveled down to a .08% increase, when the government expected a 1.0% mark.  Mortgage-Backed Securities enjoyed that info. early in the morning, however, again, the market is jittery before the five-year note auction set for this afternoon. 

New Home Sales

These figures were hot again!  We expected approximately 390,000, however, reports came in at 433,000.  This is, generally, not good for rates because it’s a good economic report that will take money out of bonds (MBS) and into stocks.  When money flows out of bonds, their values go down, and therefore, their yields (or interest rates) increase.

Mr. Optimistic

Yes, generally, I consider myself an Optimist, however, are these housing numbers due to a lack in construction?  Possibly!  How about, as mentioned in yesterday’s article, people moving whilst the gettin’s good?  While rates and home values are at one of their most opportunistic times?  Perhaps both!

What To Do?

Currently, take advantage of yesterday’s surprise and float into the day.  But, your loan expert better have their finger on the lock button…like I will today.  Until tomorrow…