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March 11, 1994
Eight is the word, now. In 30 hours from noon Wednesday until market close on Thursday, mortgage rates rose a quarter of a percent. Be prepared for client confusion: this weekend, national media reports will have old, low rates from surveys taken early in the week.
New data on the economy do not explain the latest rise in rates. Retail Sales jumped 1.5% in February, but a downward revision for January wiped out the gain. Initial Jobless Claims rose 32,000 last week to 346,000.
Nobody has a good explanation for the month-long debacle in the bond market. Here are the failed theories.
Inflation. Inflation erodes the value of bonds and mortgages. Inflation would be a good explanation for higher interest rates, except that there is no sign of new inflation. Oil prices are falling, and gold prices are $25 under their highs of 1993. Inflation may increase from 2.5% to 3.0%, but that increase does not explain the leap in bond yields from 5.85% last fall to 6.99% this morning.
The Fed. A month ago, the Fed tightened one measly quarter of a percent, and has done nothing since. Too little? Too late? Too much? Nothing here.
Hot Economy. Sure, there is a correlation between a hot economy and new inflation, but see "inflation," above. Besides, in that red hot 90 days last fall, productivity (the bane of inflation) jumped at a 6.1% pace, best in a decade. The economy may overheat, but not yet.
Whitewater. During the worst of Thursday's bond market, a rumor circulated that Vince Foster's suicide was faked: he was really killed by Democrats and dumped in his car. Media reports today attribute bad bonds to a Whitewater-caused loss of confidence.
Please. It could turn out that Hillary stabbed Foster with a hat pin, and Willie has a Swiss bank account, and the news wouldn't have a serious effect on bonds. Bond investors never have trusted the Clintons, or Democrats in general.
Trade War. Secretary of State Warren Christopher is in Japan and China this week, possibly threatening a trade war. No problem. The Secretary has yet to meet an issue he couldn't reduce to total, meaningless confusion.
There is one little quirk in the markets which may shed some light: all bond markets around the world have been hammered at the same time as ours. The 10-year German "Bund" is as battered as the U.S. Treasury 10-year note.
It happens that all governments in the industrialized world are running budget deficits at the same time, and competing for the same, world-wide pool of savings. Competition drives up interest rates everywhere, at least until the higher rates squash the various economies -- which were not in very good shape to start out with.
This rate rise is unpleasant, but probably self-limiting, and at or near a top.
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