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March 17, 2000
All economic indicators are moving in a pattern which should put upward pressure on mortgage rates.
Indicators be damned: mortgage rates fell this morning to the lowest level since December: 8.25% on the low-cost, thirty-year packages.
The indicators, anyway....
Upward pressure number one: the Fed, which will raise its rate to 6.00% on Tuesday; for the first time so high since 1995, and then for only six months.
Two: Retail sales, which surged another 1.1% in February.
Three: The "core" rates of wholesale and consumer inflation rose only .3% and .2%, respectively -- nifty results which omit the exploding prices for energy. The overall indexes leaped 1% and .5%, better explaining the 18-wheeler march on the White House to protest diesel prices.
Four: The overall trade deficit is out of control, up 50% in a year. One of the crucial safety valves for our overheated consumption has been a flood of cheap imports; last month the prices of imported goods rose at a nine-year record pace.
Five: Housing starts sailed to a 13-month high.
Six: The stock market. Holy smokes.
Enough of reasons why mortgages should do what they are not doing.
The Treasury's buy-back of outstanding debt is clearly pulling down mortgage rates.
The magnitude and the effects of the buy-back are still dawning on the markets. This week's fall in all long-term rates is traceable to new evidence of budget surpluses expanding beyond the most optimistic forecasts, and therefore ever-larger buy-backs. The Treasury is on a billion-a-week program as it is, buying long term bonds; and will probably exceed $40 billion for the year.
Note the still-developing drop in long vs. short rates:
January 21
Last Week
Today
Fed funds
5.50%
5.75%
5.75%
1-year T-bills
6.11
6.17
6.19
2-year T-notes
6.48
6.51
6.48
5-year T-notes
6.64
6.58
6.42
10-year T-notes 6.78
6.37
6.18
30-year T-bonds 6.70
6.18
5.99
30-year Mortgages 8.50
8.375
8.25
If Mortgage rates stay down, tied to the buy-back and ignoring the Fed's rate hikes, then the protected housing market will make it harder for the Fed to slow the economy.
Which, presumably, will make the Fed try harder.
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