|
August 27, 1993
The newest mortgage rate lows are so low that they are off historical charts. The last time rates were this low was probably 1968, preceding the record-keeping of the modern securitized mortgage market. We are working off antique annual averages, now.
Economic data played no particular role in this week's extension of the bond rally. A surprise 3.8% slump in Durable Goods Orders was offset by a 5.4% surge in Existing Home Sales.
There is no obvious limit to how low the interest rate rock bottom can be. When a market is in an authentic, generational change of regime, there are no parameters.
30-year mortgage rates are in the process of crossing the 7.00% barrier (no points, no origination), and there is no rule that says "Tilt!" if rates attempt to proceed below 6.75%, 6.50%, or 6.00%.
There is not only no rule against a deep bottom, there is no good way to tell if rates are getting close to the bottom.
This latest move down, beginning two weeks ago, is the latest leg in the "steep yield curve" story.
The question, ever since the widening became extreme in 1991, has been how the spread would narrow, not whether. Would short rates rise, as it seemed this Spring? Or would long rates come down? Or both move towards the middle?
The answer is clearer every day that consumers prefer to save instead of spend. The long end is caving in.
Long rates can continue to go down until a proper spread with short rates is restored. "Proper" would be about 2.50% between T-bills and T-bonds.
By this logic, if T-bills stay where they are at 3.00%, long rates have another three-quarters of a percent to fall. There is no law against further Fed easing (as weak as the economy is, further easing may be likely); if the Fed knocks the T-Bill rate down another half percent, long rates can fall a total of 1.25%.
Which would put mortgages at 5.75%. Gulp.
In any normal bond market, we would be worried about an uptick in the economy bringing our low rate episode to an unhappy conclusion. The market assumes that this time, the Fed will react instantly to any sign of inflation, or too-rapid growth in the economy.
There is no statute preventing that oddest of bond market oddities: a tightening Fed coupled with falling long term rates. In the long run, a tight, vigilant Fed is the ultimate reassurance for the bond market.
That, and a sharp eye out for overconfidence.
|
