Interest Rates Continue to Suffer At The Hands of Increasing Stock Markets: Sentiment among market moving investors continues to shift toward a perspective that economies around the world are not in danger of melt down even though Europe seems to be slipping toward stagnation or recession. This shift is causing more money to move in to stock investments and away from bonds. The result is increasing interest rates. The stock market rally does not seem to be connected to the amount of real recovery in the overall US economy. For this reason many people see the recent moves in the market as pack mentality momentum trade as fund managers cannot ignore profits that are available. The interest rate markets now seem to reflect the possible end to the 30 year old bond market rally that started in 1983 with 30 year mortgage rates at 17% and the 10 year note at 18% (bank prime rate at 20%). The action in the rate markets that was triggered by the stronger April employment report has not been able to achieve even a modest reversal after significant move higher in a shorter amount of time than typical. Mortgage rates moved up about .15% last week. Another factor not helping is Japan’s plan to weaken its currency which is working against the US bond market; as the yen falls there is less demand for US bonds. Every signal that traders watch as an indicator on the bond and mortgage markets is now solidly negative. Last Friday in a Tweet PIMCO co-CEO and bond king Bill Gross declared the end to the declining interest rate rally, even after a month ago Gross said he was increasing PIMCO’s investment in US notes and bonds. Commentary from several Federal Reserve members about possibly ending their bond buying program is not helping rates as well. There is more detailed commentary from one of our market analysts below. At the same time there are dissenting voices that are saying the stock market is set up for a major reversal.
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"April showers bring May flowers." The economic data from April continues to pour in during May. Read on for details and what they mean for home loan rates.
Housing received some mixed news last week as Housing Starts declined by 16.5 percent in April to 853,000 units annualized. This was below expectations and due in large part to a drop in apartment building activity. On the flip side, Housing Starts are up 13 percent from April 2012 to April 2013. In addition, Building Permits (a sign of future construction) surged by 14.3 percent in April to 1.017 million units, well above expectations.
The labor markets received some bad news last week as Weekly Initial Jobless Claims rose by 32,000 to 360,000, the highest level since late March. While one bad reading doesn't make a trend, we need to pay close attention to this report in the coming weeks. The manufacturing sector also continues to be a drag on the economy, as both the Empire State Index and the Philadelphia Fed Index came in weaker than expected.
But Retail Sales for April were above estimates, showing that consumers are resilient after pulling back spending in March. And inflation at the wholesale and consumer levels remained tame in April. In fact, the Consumer Price Index (CPI) fell by 0.4 percent--the lowest rate in four years.
What does all of this mean for home loan rates? Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates (which are tied to Mortgage Bonds) improve. While Bonds benefitted from some of the weak economic reports last week, the mix of good and bad news made for a volatile, back-and-forth week between Stocks and Bonds as Stocks continue their record run.
However, also helping Bonds and home loan rates is the fact that inflation remains non-existent, as inflation reduces the value of fixed investments like Bonds. This gives the Fed cover to continue its Bond purchase program known as Quantitative Easing--despite some opinions that the program should come to an end.
However, home loan rates remain near historic lows and now is a great time to consider a home purchase or refinance. Let me know if I can answer any questions at all for you or your clients.
The current move to exit long positions in the bond market is driving rates to levels we were not expecting a couple of weeks ago. We are now seeing a reversal of positions by the market that had built over the last few months on bets prices would increase and yields decline The race to the exit has done severe technical damage to the positive outlook that had prevailed for months based mainly on the Fed continuing its easing and thoughts the economy is slowing. This has rattled fixed income markets and increased the view the end has arrived. The Fed hasn’t implied anything that it is about to end its monthly buying of treasuries and mortgages, so far there isn’t any evidence that the Fed will stop soon. Nevertheless, the rate markets are seriously wounded now. Speculative long positions or bets prices will rise, outnumbered short positions by 37,956 contracts on the Chicago Board of Trade. Net-long positions fell by 94,088 contracts, or 71%, from a week earlier, resulting in the biggest reduction in net longs since March. Hedge funds decreased their long positions in 10 yr note futures at the end of last week according to the CFTC.
No matter how we look at it, the speed and depth of the selling in the bond and mortgage market clearly states investors and traders are unloading a lot of the long positions held on ideas that rates would decline to re-test the lows at 1.40% on the 10 year note seen last year. No matter how we try to paint a more optimistic outlook, we just kind find anything now that provides any near term evidence of a rebound. The momentum oscillators we monitor measuring the speed and magnitude in determining overbought or oversold are approaching over-extended levels but still not yet there yet. There will be a rebound, but from what levels? As we continue to remind; do not fight the tape here. This market at present is very bearish. Most all the main global economies are weakening, but as long as the Fed and other central banks continue to keep interest rates at these extreme lows stock markets will continue to improve. But look out when the time comes for the Fed to begin unwinding of its QEs; unless there is a raid change in the economic outlooks and data supports that view, the global equity markets are set up for a major reversal.
Government May Not Be In A Hurry To Sell Fannie and Freddy: Fannie reported a $18B profit in the fourth quarter of last year. Now Freddie announced it made a profit of $4.6B in Q1. Fannie released its Q1 report a few minutes ago and profits are up $8.1B. That the two government owned agencies are now making nice profits will likely continue and return all of the bailout funds from the housing market collapse. Freddie will pay back $7B to Treasury; the agency got a $71B rescue and so far has repaid about half of it. Fannie and Freddie have returned to profitability and will end up repaying all of the tax payer’s money much sooner than those politicians, in their panic reaction to the housing bubble burst, expected. Barney Frank and Chris Dodd along with many other panicked politicians, not having much of a clue about the housing and business sectors, were intent on shedding the two agencies; maybe that they are profitable now will cause a change in sentiment, especially since the two politicians that set economic recovery back at least five years have gone out to pasture with the life-long pensions.
Case Shiller Index Shows Continued Improvement: The 20 city index for February suggests that the nation’s real estate markets continue to improve. The overall gain year over year in values came in at 9.3%. This is the largest increase since 2006; prior to the crash.
Hood Canal Real Estate, Mortgage, and Economy - May 15, 2013