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August 9, 1991
Mortgage rates fell to new lows for the year despite vast borrowing this week by the Treasury. The markets had a lot of help, and needed it.
The Fed eased on Tuesday, reducing the Fed Funds rate to 5.50% from 5.75%. The move was not a big surprise, but it was certainly an abrupt shift, coming only a month after Chairman Greenspan's reassurance about an economic recovery. Not coincidentally, the Fed made its move on the first day of the Treasury's threeday borrowing bender.
The Producer Price Index fell .2% in July, and the stickier core rate gained only .2%.
So, are rates going down some more?
Making it through an auction week is always a good sign. Treasury borrowings are the credit markets' version of the canary in a coal mine, and this bird hasn't looked better in years. Chirp.
Inflation reports continue to be good. If inflation is really coming down to the 23% level from 45%, mortgage rates are headed for the eights.
The money supply continued flat this week. Everybody has a theory: weak banks, weak borrowers, a black hole at the RTC, stingy consumers, money rolling from CDs to mutual funds, or the old standby, a meanhearted Fed. No matter why, for now: so long as money isn't growing, investors' inflation fears are down.
The stage is set for lower rates. But the analytical setting here doesn't mean as much as the odds. Future rate movements are much more a matter of probabilities and trends than equations with hard answers.
"What are the odds?" is a better question than "whether" rates will go lower.
The last time mortgage rates were lower than they are now was December 1986 through March 1987, "The Great Refinance Frenzy."
The last time before that was 1978.
Four months at nine or lower at par in thirteen years is not a good set of odds.
Can we go into the eights? Sure. Going back into recession might do it. So would "Oil Discovered Under Manhattan Island!" "Accounting Error At RTC: $500 Billion Going Back to Treasury!"
It is possible that there is a change in the long term trend in American finance. But when rates are near decade lows, take them!
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