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June 21, 2002
Last week's drop in mortgage rates below 6.75% might well have resulted in a quick, V-shaped rebound, driven by too many refinance applications. Instead, to the surprise of a lot of people, there is no rebound: the lowest-fee, 30-year packages remain just above 6.50%.
There are strong reasons other than refinance demand for rates to have rebounded.
Record lows produce enormous resistance in the bond market: no investor or trader wants to be the first to buy a long-term security paying the lowest yield in 35 years. Excepting the panic immediately after 9/11, the yield on 10-year Treasury notes this week (in the 4.70s) was the lowest since April, 1967.
Nobody in the bond market wants to be a pioneer, or worse yet, a collector of unique objects. If this turns out to be a bottom for rates, any trader buying mortgages or bonds here will own the worst investments made by any trader in two generations. That error will get you fired.
Next, we got some decent economic data. Housing starts in May recouped the March-April dip, and then some; foreign trade data revealed an increase in domestic demand; and the four-week moving average for new claims for unemployment insurance held below 400,000 for the first time in three months. The slope of the recovery is gentle, for the time being, but nothing in the economic data suggests a double-dip back to recession.
Rates have gotten low and stayed low for one reason: the stock market. Every time rates attempted to rise this week, a new wave of stock selling tamped rates back down. Stocks have fallen five weeks in a row. As we go to press midday Friday, the S&P 500 is trading under 1,000 again, and may close there for the first time since last fall; the index is down almost 14% so far this year.
There were no new corporate mis-governance poster boys dragged off to the hoosegow this week. However, confidence in earnings (both real and pretend) is fading. IBM's forecast was downgraded yesterday, and Bloomberg today posted a gruesome story on Sun Microsystem's situation; and today's selling included previously protected sectors, like healthcare.
The Middle East and potential acts of domestic terror are a corrosive influence on stocks, but by and large, investors frightened for those reasons into selling stocks and buying bonds have already done so. A weakening dollar may be causing sales of American stocks (by domestic as well as foreign interests), but currency-value cause and effect is tricky: the sales of dollar-denominated securities are causing dollar weakness, not so much the other way around.
The main reason stocks are falling is the simplest and worst: they are not worth their prices.
That awful litany aside... take any rate you're offered below 6.75%. Lower than 6.50% would be nice, but refi pressure will prevent any rapid move below that next threshold, and any miraculous recovery in stocks will -- instantly -- take rates back above 6.75%.
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