jimculler
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Will the market continue to keep a record spread? Or will the rate cuts finally be passed on to the consumer?
In yet another twist, the market’s psyche shifted back to economic growth (or lack thereof) over inflation (or fear thereof). Accordingly, interest rates plummeted and bonds prices soared last week. The consumer was the main culprit; consumers are “worried about their jobs, their depreciating homes, the debilitated dollar, tight-fisted lenders, and $4 gasoline,†reports Barron’s. What a shock that consumer confidence hit a five-year low.
AN INSIDER'S VIEW FROM THE CAPITAL MARKETS COOPERATIVE TRADING DESK:
“We’ll take anything that restores confidence and liquidity. As such, it was big news that OFHEO lifted the portfolio caps for Fannie and Freddie. The agencies will still be constrained by their capital requirements (they can only buy so much with a given amount of capital), but OFHEO is considering reducing capital requirements as well. On the news, the spread between mortgage and Treasury yields shrank briefly, but ended the week at 2.86%, within the range that it has traded for several weeks now.
One analyst said it all: ‘Mortgages are meaner than a junkyard dog!’ He meant that in spite of good news from OFHEO, mortgage rates stayed stubbornly, historically higher than Treasury yields. Bear Stearns reasoned that relatively high mortgage rates are being driven by a “widening spiral,†which consists of: credit problems & weak housing = losses for the agencies = capital depletion = potential for forced sales to meet OFHEO capital guidelines = wider MBS spreads = higher primary mortgage rates = deeper troubles for housing ... The mortgage-to-Treasury spread is nearly six standard deviations wider than economic models would predict based on current levels of volatility, rates, and the like.
The Fed is also worried about a market spiral, to which they refer (in Fed-speak) as an “adverse feedback loop.†This loop consists of: weaker economic activity = worsening of financial conditions = reduced availability of credit = ever weaker economic activity. So, they think things could get worse, and a very weak employment report is expected this week to further their concerns.
Fed funds futures predict the lowest funds rate so far in this cycle: 1.77% in October of this year. The Fed is clearly worried about the economy in the near term, and rate cuts are on the horizon. In just one paragraph from the January Fed meeting (reports John Mauldin), the Fed used the words “fell,†“plunged,†“dropped,†“moved down,†“declined,†and “restrained†to describe the housing market. We’re hoping for all of this cycling, looping, dropping, and reversing to end soon.
In yet another twist, the market’s psyche shifted back to economic growth (or lack thereof) over inflation (or fear thereof). Accordingly, interest rates plummeted and bonds prices soared last week. The consumer was the main culprit; consumers are “worried about their jobs, their depreciating homes, the debilitated dollar, tight-fisted lenders, and $4 gasoline,†reports Barron’s. What a shock that consumer confidence hit a five-year low.
AN INSIDER'S VIEW FROM THE CAPITAL MARKETS COOPERATIVE TRADING DESK:
“We’ll take anything that restores confidence and liquidity. As such, it was big news that OFHEO lifted the portfolio caps for Fannie and Freddie. The agencies will still be constrained by their capital requirements (they can only buy so much with a given amount of capital), but OFHEO is considering reducing capital requirements as well. On the news, the spread between mortgage and Treasury yields shrank briefly, but ended the week at 2.86%, within the range that it has traded for several weeks now.
One analyst said it all: ‘Mortgages are meaner than a junkyard dog!’ He meant that in spite of good news from OFHEO, mortgage rates stayed stubbornly, historically higher than Treasury yields. Bear Stearns reasoned that relatively high mortgage rates are being driven by a “widening spiral,†which consists of: credit problems & weak housing = losses for the agencies = capital depletion = potential for forced sales to meet OFHEO capital guidelines = wider MBS spreads = higher primary mortgage rates = deeper troubles for housing ... The mortgage-to-Treasury spread is nearly six standard deviations wider than economic models would predict based on current levels of volatility, rates, and the like.
The Fed is also worried about a market spiral, to which they refer (in Fed-speak) as an “adverse feedback loop.†This loop consists of: weaker economic activity = worsening of financial conditions = reduced availability of credit = ever weaker economic activity. So, they think things could get worse, and a very weak employment report is expected this week to further their concerns.
Fed funds futures predict the lowest funds rate so far in this cycle: 1.77% in October of this year. The Fed is clearly worried about the economy in the near term, and rate cuts are on the horizon. In just one paragraph from the January Fed meeting (reports John Mauldin), the Fed used the words “fell,†“plunged,†“dropped,†“moved down,†“declined,†and “restrained†to describe the housing market. We’re hoping for all of this cycling, looping, dropping, and reversing to end soon.
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