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May 12, 1989
Euphoria swept the bond market this morning in response to Wholesale Price data up only .4%, less than half the inflation rise feared. In the largest singleday rally in recent memory, mortgage backed securities are up a point and a half, most of which will be translated into improved discounts.
In other data this week, Retail Sales rose marginally at plus .4% while the market had anticipated a strong 2% rise. Consumer Credit jumped at a 9.4% rate in March despite weak borrowing for autos. A credit increase of this kind usually bodes economic strength, but this time the borrowings may be related to unhappy income tax surprises.
On a scale of bond market happiness we have passed the three martini level and are headed for four. This week's data are authentic confirmation that the Fed will not tighten again soon, and may be thinking about easing for the first time in over a year.
In a period of rising mortgage rates it doesn't take a rocket scientist to know it's a good idea to lock in a mortgage rate early. However, as rates begin to look as though they may trend down, helping a client to manage interest rate risk gets harder. Here are two thoughts which may help.
Gamble only as much as you can afford. If you think that floating a rate may pick up a point or two, have a budget for how wrong you can afford to be before you lock in at a loss. Vegas is the place to go to gamble; please don't make the Vegas error of doubling the stakes when your luck is bad.
This bond market is driven by economic data to the greatest degree many traders have ever seen. In the early 80's, during Volcker's misguided experiment with rigid reaction to changes in the money supply, the bond market would freeze each week until the Friday afternoon release of the Killer M's. Now, the market is watching Greenspan watch the economy, which Greenspan is doing in more detail and with less political influence and screwball theorizing than any Fed in maybe 20 years. It's pretty safe to float in between data releases because nothing much happens.
The next key data is Consumer Prices on Thursday, which will let us know whether or not this party is going to have a hangover.
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