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March 26, 1993
Long term rates vibrated in a narrow range this week. There was little new economic information, too much attention paid to instability in Russia, and not enough paid to news which will arrive on Friday, April 2.
Durable Goods Orders had a pretty good month in February, up 2.2%, while bad weather forced a 6.1% decline in Existing Home Sales. Initial Claims for unemployment insurance held high at 349,000 for the week.
Many clients asked about events in Russia, and their potential impact on mortgage rates.
Any international crisis tends to frighten long term investors, who then sell bonds, which can drive up long term rates. However, this panicked selling is usually offset by a flood of money from overseas buying American Treasurys for safety.
The bond market returns to normal in just a couple of days after almost any international crisis: panic rarely changes economic fundamentals. For example, the bond market was a remarkably peaceful place throughout the Gulf War.
In the case of instability in Russia, the media hype has it that "hard liners" may take over and renew the Cold War, which would keep defense spending high, and make our whole budget deficit worse.
It's guesswork, of course, but the unpleasant Mr. Khasbulatov's hard liners seem to be a collection of corrupt ex-apparatchiks trying to hang onto as much of the take as they can. They are no more interested in gearing up to reclaim their sooty, impoverished empire than is Mr. Yeltsin.
There will be periodic upsets in Russia and its sister republics for decades as they organize their new political systems. Any budget pressure on bonds is less likely to be military spending than the amazing thought that we can send enough money to Russia to alter the outcome. We don't know how to send emergency aid to Florida, let alone to Russia.
In the real world, no guesses, next Friday morning brings job statistics for March. If you recall, the February report showed a surge of 350,000 new jobs, which everyone dismissed as unsustainable, aberration, or error.
It's possible that the Labor Department counted Pittsburgh twice, but if there is no revision in the February number, and March shows a healthy job gain, bonds will have an unpleasant day (week, month, Spring).
But, if the February number is modified a little, and non-farm payrolls rise less than 100,000, mortgage rates will resume their ride toward the sixes.
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