|
May 17, 1996
Since the explosion on March 8, 30-year mortgage rates have bounced between 8.125% and 8.50% at "zero and zero" prices, and this week held smack in the middle, alternately 8.25% and 8.375%. No big change is likely until the next non-farm payroll follies on June 7.
Hopes for a rapid return to the sevens have rested on expectations that higher rates this spring will soon slow the economy. New data do not provide comfort for the theory.
The housing market is the most vulnerable to rate rises, and April housing starts climbed a healthy 5.9%. One graveyard whistler, struggling for optimism: "Well, maybe people are hurrying to buy before rates rise some more, and sales are being robbed from May." Economists like this thinking, but I never once met a buyer who felt that way.
Keep it simple: housing sales numbers are still good because the housing market is still good.
In the most recent episode of Tales From The Crypt, Bob Dole picked the wrong job from which to resign.
What fun it would have been: "I love the Senate, my campaign looks like Kansas wheat after a hailstorm, and I've decided to open the convention. My delegates will support the best looking one of those energetic young governors: Whitman, Weld, Engler, or Thompson. Whichever."
Oh, well.
The Treasury will soon begin to sell bonds indexed to inflation. Real estate people, used to decoding indexed mortgages (ARMs), should have a particularly good time following the response of the investment community and evaluating the prudence of the proposal.
Many investment types are less than thrilled. With these new bonds, you earn a guaranteed, inflation-protected return of 3%, your money doubles in 24 years, and you don't need the slightest help from a broker.
One broker, overreaching ever so slightly, suggested there would be new mutual funds investing in indexed Treasurys. Why bother? Why pay a management fee when there is no trading strategy which will increase the yield printed on the bonds?
Prudence for the Treasury (and for us: we pay the interest as well as earn it) is a different matter. One proposal for the index mechanics goes like this: the Treasury pays 3% interest in cash, and each year adds the inflation amount to the outstanding principal of the bond. If inflation is 5%, the outstanding principal value of the bond will rise from $1000 to $1050.
People familiar with mortgages will recognize negative amortization when they see it, and I hope the Treasury will take the same, dim view held by most of us.
The Treasury owes enough principal as it is.
|
