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September 1, 2000
Today's market reaction to August economic data repeated a summer-long pattern: a perfect set of reports which should have taken mortgage rates lower... didn't.
Fannie/Freddie stuff is still stuck near 8.00% for the low-fee packages.
It may be frustrating that a continuous supply of good news brings no interest rate benefit, but we are hardly in a bad place: mortgage rates are only a half-percent higher today than they were sixteen months ago, when the Fed began to raise the Fed funds rate from 4.75% to 6.50%. Not bad, not bad at all.
The data. Net of census-worker layoffs, a strike or two, and some private sector hiring, payrolls were flat in August. As the workforce grew versus flat payrolls, the unemployment rate rose from 4.0% to 4.1%, just exactly the hoped-for, gentle easing in a too-tight labor market.
Two other August snapshots confirmed a polite slowdown. The purchasing managers' survey fell below 50% for the first time since January 1999, at 49.5% indicating a slight contraction. "Same-store" retail sales (stores open at least one year, thereby excluding distortions from new-opening promotions) rose only 3.2% from last August to this, a welcome sign of restraint among too-eager consumers.
Restrained, slowing, flattening... but not the slightest evidence of conditions which would motivate the Fed to ease. Little tidbits like the 14.7% rebound in new home sales in July will keep the Fed right where it is.
Fed aside, the most powerful factor in the credit markets in 2000 has been the retirement of marketable Treasury bills, notes, and bonds outstanding.
The total public debt is roughly $5.6 trillion, but that figure includes $2.5 trillion which government owes to government, largely a wash. The remainder, three trillion and change, are the "Treasurys" traded in financial markets.
In July, 1997, the peak marketable outstanding was $3,433,097,000,000. By July, 1998, the total had fallen by $82 billion... by July, 1999, another $127 billion... July, 2000 another $178 billion... a steepening slope.
The increased scarcity of Treasurys has driven their yields to ridiculous levels: today's 5.66% 30-year T-bond yield versus the Fed's 6.50% overnight cost of money... is ridiculous. These super-low Treasury yields have dragged down other rates, including mortgages, but the market is near the limit of beneficial effects from Treasury scarcity.
Scarcity adds value, but Treasurys will never be Rembrandts.
It's wise to remember two threats to the budget surplus funding the Treasury buy-back. First, a recession, someday; second, our elected representatives. One party would cut the surplus revenue, the other would spend it.
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