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May 26, 1989
The bond market retreated at the end of this week, and discounts are up a little from Tuesday's 1989 lows.
Durable Goods Orders rose a solid 2.9% in April, and First Quarter GNP was revised down from 5.5% growth to 4.3%, still a rapid pace. Reflecting the slowdown since, Existing Home Sales fell 1.1% in April.
The dramatic improvement in rates in May is traceable to an abatement in inflation, a slowdown in the increase in economic growth (not a recession), and an explosive gain in the value of the dollar. The last has been the most important factor in the past week. It's hard to believe that a Colorado homebuyer's discount points are dependent on foreign reaction to the value of the dollar. When the dollar goes up, investors want to own financial instruments denominated in dollars, so up go bonds and Tbills, and so do Ginnies, Fannies, and Freddies.
All right; are even lower rates ahead? The bond market is ready for more, but won't go further without a clear sign from the Fed, and will retreat without such a signal.
Here's an indication of how blind the market is to Federal Reserve intentions. Robert Heller, a Fed Governor, made a speech on Tuesday. Next day, the Wall Street Journal interpreted his remarks as advocating easing by the Fed. The New York Times' headline read "Easing of policy by Fed unlikely, member says." The Journal and Times get their Fed tea leaf reading done in interviews of big time bond traders, who appear to be less than unanimous.
In the last 60 days we have had mortgage discounts of one and change at everything between 10% and 11.5% note rates without any policy change at the Fed. We will tend to stay in the middle of that range until the Fed blinks.
One surefire indicator of higher rates would be a decrease in the VA rate to 10% today. The VA's boneheaded effort to set favorable terms for veterans frequently results in a four or five point discount at the posted rate, and a useless entitlement.
Even if the VA doesn't move, for now please try to do VA deals at 10% and two or three points. If you pursue 10.5s at a fraction, sure as sunrise the VA will blow out all your deals by lowering the rate.
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