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March 31, 1995
The credit markets struggled during most of the week, and mortgage rates rose about a quarter percent, finishing just under 9.00% at zero and zero.
Weak economic data should have supported the market: new home sales slumped 14% in February to a three-year low, and existing home sales tumbled 5%. The Bundesbank reduced German interest rates, which helped the dollar, but failed to do anything positive for bonds.
In the next few weeks, long term rates are unlikely to return to their lows, and may well rise some more. There are several reasons for rate worries.
First, rates fell a long way in the first three months of the year: Treasury bonds dropped from 8.00% to 7.35%, and mortgages even more, a full point down from 9.625% to 8.625%. This decline was complete by early March.
When a market makes a big move, and then waffles for three weeks, unable to make more progress, the next most likely move is in the opposite direction. This is the Tigger Wrestling With The Tablecloth theory of markets: extreme movements are followed by thrashing countermoves.
Second, the Fed held steady at its meeting on Tuesday. Perverse as it seems (and backwards from what you read most places), aggressive tightening by the Fed is the reason that long term rates fell in the first quarter. Now the reverse is true: though nobody expected the Fed to tighten on Tuesday, the bond market had its worst three days in a month immediately after the Fed's decision to hold still.
Third, though the economy is evidently slowing, it is nowhere near slow enough to guarantee an end to inflation risk. Also, the economy has slowed at the end of each of the last three Winters, and then screamed from Summer to Christmas. There is nothing in the Fed's tightening so far which precludes a strong rebound in the economy.
Fourth, interest rates show some tendency to rise in the Spring. Realtors consider this pattern to be a conspiracy to profiteer on brisk, Spring sales, just the way gasoline prices always go up before the 4th of July and Labor Day. Finance types think the "conspiracy" lies at the IRS, and rates rise in April because people and corporations have to borrow to pay taxes.
This is not a forecast for a big rise, just a warning to anybody holding off from buying because they hope that rates are going back into the sevens. The same warning goes for anybody holding off from an ARM-escaping refi any time rates get back down to 8.75%.
The long term, into next year, still looks good. (Note that this entire forecast expires upon the release of next week's employment data.)
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