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June 13, 2003
Mortgage rates held at the four-straight-week low, near 5.25%.
This stability is an illusion. Treasury yields have plunged, but mortgage rates are propped by new-loan volume, and investor reluctance to accept the risk unique to mortgages: how long might these loans last? The average five years? Or are they twenty-year bets? Still, mortgages are poised to ratchet lower, ever-so-slowly.
Mortgage rates reached 5.25% when the ten-year T-note fell to 3.50% a month ago. Until this week, the ten-year T-note traded in a 3.45%-3.25% range in the classic, orderly, technical fashion typical of a market after setting a new 47-year low. Normally, that range would have persisted, as the market waited for summer economic data, and measured the durability of the stock rally.
Instead, this week the ten-year T-notes blew down through the 3.20s, and by today reached 3.09%. Shaky economic data helped: "sluggish" May findings in the Fed's "beige book" were confirmed by news of flat retail sales in May; and we learned today that consumer confidence sagged in early June, especially confidence in the future. However, no data suggest a new recession, or authentic deflation.
Yet, panic. Not the traditional war, credit, or recession panic, but a yield panic, a desperate rush to buy the last securities paying a return. A five-year T-note pays 2.01% today, and a two-year pays 1.05%. Put a $100,000 in an average money market fund for a year and you'll earn five hundred bucks, pre-tax. Beats greenbacks in a mattress. Even the 1.5% dividend return on the S&P 500 starts to look okay.
Why the buy panic? Alan Greenspan wants it this way. He has not had to buy long-term securities to drive down long-term rates; the threat to do so has been more than enough. He has not sent the slightest signal that he thinks the credit markets are over-reacting, though his actions and comments at the June 25 Fed meeting will be instructive.
For the first time in this three-year refinance cycle of cycle of cycles, I feel an absence of urgency among borrowers. Beyond being tired of the refi process, and tired of us, consumers seem to hear the Chairman's music: rates are going down, and will stay down... so why hurry?
For the first time, there is no good answer, except the stopped-clock one: this thing will turn on a surprise in the economy, one Mr. Greenspan is trying hard to engineer; and when it does turn, the boat-missers will magnify the G-force.
(Freddie Mac footnote. The accounting irregularities and executive-suite flushing at Freddie are a tempest in a small but competitive teapot. Banks hate Fannie and Freddie because banks can't compete, and are reduced to broker status, just like all the rest of us. Stock market types hate the housing market and any entity that helps it because housing investments beat the stuffing out of financial market ones. Any misstep by the agencies, and their opponents want them regulated out of business.
On the other side, Fannie and Freddie claim that the supply of mortgage credit would collapse without them -- which is nonsense, as the healthy market for non-agency "jumbo" loans attests. The federal agency credit status does save consumers .25%-.50% in rate, worthwhile, but that's all.
As potential taxpayer bailout candidates, no one should lose sleep over Fannie and Freddie as credit guarantors of a couple of trillion dollars' worth of mortgage-backed securities. In a foreclosure problem, the agencies have houses and their equities between them and loss. However, both outfits have gotten a bad case of the bigs as owners of about half the guaranteed securities -- as late as 1996 the owned portion was only 20%. The wisdom of this massive investment depends on the "derivative hedging strategies" used to offset interest-rate risk, strategies which will be mightily tested in the high-G turn noted above.)
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