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April 28, 1995
The weak dollar, weak economy condition has reversed itself with no impact on mortgage rates.
The first three months' growth in Gross Domestic Product came in at 2.8%, the slowest in two years, but still strong. Existing home sales rebounded 5.8% in March, propelled by lower mortgage rates, and a .6% gain in March durable goods orders recaptured the February drop.
Meanwhile, the dollar bounced back to 83 yen, and gold retreated below $390.
Bond yields and mortgage rates have held an extremely tight one-quarter percent range for more than two months. One general wisdom holds that the longer a market stays in one place, the more explosive the ultimate move will be.
Such is bond trading: weeks of boredom interrupted by moments of sheer terror.
For example, from July, 1993 until February, 1994, mortgage rates stayed between 7.00% and 7.25%. From the second week of February until April Fools Day, the bond market suffered its worst seven weeks in seven years. Stability can lead to good news as easily as to disaster: those seven months near 7.00% were preceded by a long stretch in the low eights.
There is no particular indication of which way we will blow out of the current range, but there are two easy things to watch. The economy, obviously, for one.
However, the modest slowdown in the economy is not the thing that's gotten rates down and held them down. The thing that did the job is the one to watch, and it's the one that has clients the most confused.
As usual, it's the Fed. Long term rates are down because of the Fed's ferocious wintertime moves, and threats of more to come whenever necessary. So long as the credit markets believe that the Fed means business, long rates will stay down, and finally drop some more.
That's where your clients are confused. As far as I can tell, everybody about to borrow mortgage money is afraid of another tightening move from the Fed. When I tell them that a tough Fed is their friend, they look at me like a guy next to them in the TG&Y checkout line who wants carryout help with a thousand pounds of fertilizer and a drum of fuel oil.
Truth, though. A mean-spirited Fed is your best pal.
In ambiguous moments, like now, the Fed is in Sphinx mode, and the chairman disappears altogether. Left alone, the chatty Mr. Blinder will create all the confusion camouflage necessary. So what's to watch?
Watch Mr. Clinton, and anything he has to say about reappointing Mr. Greenspan. You wouldn't want to own bonds (or have an unlocked mortgage) on a day when Willie waffles with the Fed chairman. You wouldn't want to be in the States if the president decides on a politically correct, easy money replacement.
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