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May 10, 1991
The Treasury raised nearly $40 billion in new cash this week without driving up interest rates. This is a moral victory, a lot like getting thoroughly drunk without having a hangover.
The April Producer Price Index released this morning gained .2% for both nominal and core rates of inflation. While not as low as hoped, inflation at 2.4% per year is hard to argue with.
On Monday morning, the Labor Department reported that business productivity had declined .9% in the first quarter of 1991. Late Monday afternoon, the Department said it had found an error, and productivity was really up one full per cent. We don't know if the new number is adjusted for productivity at the Labor Department.
Last week most banks dropped the prime rate to 8.5%. A brief survey this week revealed that every single mortgage borrower in the country wants to know how fast mortgage rates will come down because prime came down.
Even if the bankerborrower relationship is a good one, declines in the prime rate can trigger an uncomfortable conversation. The borrower starts with "I saw in the news that the Fed easedŠ", and finishes with "Šand the newspaper said mortgage rates would be right behind."
Borrowers' fears of being overcharged are reasonable. The financial misinformation in the national press is fantastic, even in the best newspapers. A column in the New York Times this week said "It will take just a week or two for the drop in prime to cause banks to reduce mortgage rates."
Dead wrong. Mortgage rates can move up while prime moves down, or when the Fed eases. Mortgage rates can fall when the Fed tightens. Prime at 8.5% today is lower than mortgage rates at 9.5% but it doesn't have to be. In the early '80s, prime hit 22%, while mortgages peaked at 16%.
Long term lenders (such as investors in mortgages) have entirely different concerns than short term lenders. A thirtyday lender at prime has no inflation fear at all, while a bond investor can't think of anything else.
No matter what prime and the Fed have done lately, the 30year bonds sold yesterday yield 8.21%. At the last Treasury auction on February 7, the yield was 7.98%.
Rates are holding steady, but it still feels like a bad scene in a cowboy movie. The Duke leans over, and says, "It's quiet out there too quiet."
Giddyup, pilgrim.
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