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September 11, 1998
Reflecting deepening concern for the world economy, money is flooding to Treasury securities. Their yields have fallen a long way, and have gradually dragged mortgage rates lower: 30-year low-fee packages approach 6.50% this morning.
To deliver the following warning seems a tad mundane in view of the seriousness of the situation, but you and your customers should know that the mortgage industry is within a quarter percent of gridlock. Because of the time lag in rate surveys, consumers will not discover until mid-week next week that perhaps seventy million of their number should refinance. Everybody, simultaneously.
Any mortgage retailer with good sense will install a two-track system, one for Realtor-sourced buyers who must be protected, and another, slower one for refinances -- even of past clients. Despite best efforts, if everybody tries to slip through the same narrow door all at once, underwriting times can go out to... who knows. Two months? Three?
To the degree that any financial news is percolating into the public mind at this moment of redemption or conclusion for the Clinton Presidency, it is the widespread assumption that the Fed will soon cut its interest rate.
The Fed funds rate -- the overnight cost of money -- is 5.50%, where it has been since March 1997. Here are this morning's Treasury yields:
90 days 1-year 2-year 5-year 10-year 30-year
4.83 4.65 4.62 4.59 4.76 5.18
The possibility of Fed easing does not adequately -- not remotely -- explain the worldwide flight to American Treasury securities.
Last Friday, Mr. Greenspan said the Fed had changed from leaning toward raising its rate because of inflation risk to a "balanced" position. Given the state of the world economy, the Fed probably is tipping toward ease. However, for these Treasury yields to be sensible investments, the Fed would have to ease at least a full percentage point, fast, which is not at all likely.
The impetus behind this newest rate drop is stark fear.
Currencies and markets in Brazil, Mexico, Chile and Argentina all appear to be coming apart, Asia-style. American banks had negligible exposure in Asia and Russia, but have nearly $100 billion out in loans to Latin America -- to say nothing of risks to trade and political stability in the region. Meanwhile, the Bank of Japan reduced its Fed funds equivalent from one-half percent to one-quarter percent, to no noticeable effect.
Despite this grim recitation, it's important to remember that panic tends to reverse and recede with all the speed and surprise with which it appeared. For rate players, this is the time for bird-in-hand, not for bottom fishing.
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