∙ Fed tries to shake stubborn rates with cut [SFGate]
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∙ Fed tries to shake stubborn rates with cut [SFGate]
The 30 year fixed WAS coming down, until the government decided to increase the jumbo loan threshold, which promptly reversed the downward trend.
Would you like that rate cut with a side of inflation?
Why can’t they reduce the benchmark rate to deal with this mortgage issue, and then begin an increase after a set period of time to deal with potential inflation down the road after the mortgage issue has passed?
@Can’t– That looks like what’s happening. But obviously banks don’t want to lend longterm money below the expected rate of inflation right now. So mortgage rates won’t drop despite fed cuts.
Yeah but the amount people are paying on existing adjustable loans is dropping. If as Satchel has put forward that a lot of the intent is to keep people paying on existing loans rather then walking away, then this helps towards that goal.
The fed doesn’t care about consumers, though, it only cares that the banks don’t fail. So perhaps the banks can gain back some of the money they’ve lost.
“Yeah but the amount people are paying on existing adjustable loans is dropping”
that’s true if they’re linked to the 10 year Treasury. It may not be true if they’re linked to LIBOR.
The Govt is doing everything in its power to try to bring mortgage rates down. Bears musn’t forget this.
Recently:
The Fed decided it would accept spotty “AAA” mortgage securities. this increases (or is meant to increase) liquidity in the mortgage market. through the TAF and TSLF many people believe the Fed is DIRECTLY at risk for losses (as far as I know, this has never happened before)
the fed decided it would allow brokerages to the discount window. that should increase liquidity as well.
Fannie/Freddie had their capital reserve ratios dropped to 20% which will open up $200 Billion to the mortgage market.
The FHLB’s (federal home loan banks) are petitioning to double their available exposure to the mortgage security market.
and so on. I’m sure more will also come to pass (like perhaps increased mortgage deduction programs, $15k tax credits, you name it)
thus far things are playing out as many of us suggested that they would (that the Fed would drop the FFR but that many mortgage products wouldn’t follow due to increased risk premium).
as you can see, the govt is taking a bigger and bigger role in the supposedly-“free”-markets. It is in many ways a covert nationalization.
this is also as many of us suspected.
and to follow through with my previous predictions: down the road, this will fail because the problem isn’t LIQUIDITY, it is SOLVENCY. Then the taxpayer will get the bill. (I mean look, we’re offloading the risk of these mortgages to the Federal Reserve, the FHLB, the FHA, Fannie and Freddie, and Ginnie). if this fails, where do you THINK the money will come from!
anyway, I would not be surprised if certain mortgage products to start trending DOWN in price now due to the progressive pseudo-nationalization of the mortgage market.
Ex-SFer Said “that’s true if they’re linked to the 10 year Treasury. It may not be true if they’re linked to LIBOR”.
What the heck. It’s the exact opposite. Most Adjustables are tied to Libor. And Libor has come much further down than Treasuries. Like not even in the same universe of down.
And generally my opinion on what should happen is also the exact opposite on agency paper (mortgage debt)…the value should go up…just as treasury debt should go down. Since treasury paper is being used to swap for agency–the values of the two should converge and the spreads should narrow.
sorry cooper, I wasn’t clear.
I was only referring to the chart above, which shows the FFR and the 10 and 30 year treasury.
a poster commented that adjustables are coming down, I incorrectly assumed they meant due to the 10 year coming down in the above chart.
I was only countering that a lot of adjustables are tied to LIBOR and not the 10 year, and that LIBOR is not on this chart.
that’s why I said “it’s true if they’re tied to the 10 year” because that is what the above chart shows
what’s not on the chart is LIBOR, so I added “it may not be true if they’re linked to LIBOR” (I didn’t say it isn’t true, just may not be true.)
that said, LIBOR is also coming down (I believe from 5 to 2.9% or so) so you are correct.
re-reading I see how my words were poorly written.
And generally my opinion on what should happen is also the exact opposite on agency paper (mortgage debt)…the value should go up…just as treasury debt should go down. Since treasury paper is being used to swap for agency–the values of the two should converge and the spreads should narrow.
cooper, I’m not understanding what you’re trying to say here.
If I understand you correctly, then we are in agreement. My point is that the govt is trying as hard as possible to bring mortgage rates down. And that all of the machinations listed above very well might do just that.
the way I read you, you’re arguing that risk premiums (what you’re calling the spread) between Treasuries and Mortgages will narrow.
this is also what I’m arguing. hence why I said “The Govt is doing everything in its power to try to bring mortgage rates down. Bears musn’t forget this.”
unless you’re arguing with my last point which is that in the end dropping mortgage rates will fail to stop the downturn due to solvency issues?
perhaps reword what you are “exact opposite” about?
I’m not sure what I said needs rewording– I put what you said in quotes about payments may not be dropping if they are linked to Libor. Then explained why the opposite is true. I’ll try again tho. Libor has collapsed from 5.55 to 2.6 right now..that’s a huge reduction. It will probably drop further in coming days. Most adjustables are tied to Libor–and don’t track the 10 year Treasury note. 30 year mortgage debt tends to track a spread over Ten year treasuries not libor or whatever.
I think we all disagree about the net effect on mortages. The government can absolutely control ARM rates, but the typical 30 year mortgage market has a life of its own. If inflation does continue to go out of control (signs of that not occuring though with commodities dropping like a rock last two days), you could see mortgages continue to rise stubbornly even though Libor drops to 1%.
Guys, just a trading insight here. The whole world is long agency paper, to the tune of about $6 TRILLION dollars! How do the dealers and investors hedge this long exposure? They go SHORT treasuries, duration-matched. They’re getting smashed on their short treasury positions (which are crushing them as rates fall for the safest gov debt) and they are getting smashed long-side as the GSE paper falls in price (spreads widen). It’s a mess. A $6 TRILLION dollar mess. We’ll see how much a difference the Fed can really make. Although I do get disappointed by the blind faith many seem to place in government, I’ll remain agnostic as to whether they can do anything right, although my heart says no.
This is all very Old Testament– debts being forgiven after seven years, sins of the father (Greenspan) being visited upon his descendant (Bernanke), and all that sort of thing.
When do we just pull the plug, press the reset button and reboot the whole system?
My vote is for next Thursday.
Satchel – speaking of trading insights (and going off-topic), I’m curious to hear what you – and others – think re: best use of available cash for medium to long term investments. Gold has obviously had a great run as the dollar has depreciated – makes sitting in cash feel a little foolish as we race our currency to the bottom.
Short the financials? It seems like this rebound after yet another rate cut might end up being short-lived given what’s on the horizon…
Buy anything long?
My pump & dump stock tip du jour: Qwest (Q). P/E of 3 (yes, three!) and it even pays some kind of miniscule dividend.
sideliner,
I’m a little reluctant to offer specific investment recommendations, but I will post some general themes I think make sense tomorrow (when it won’t matter that it is off topic, so I don’t incur the wrath of the board censors!). Nothing earth shattering – just common sense, with some options lingo for those who undrstand options trading.
Well Satchel..I was really shocked about the Tbill market today. I looked at the index and thought i was looking at some other symbol on my screen. I wonder if everyone is piling into tbills out of longer terms paper. And once the flight to safety corrects 10 years come back much higher. The commodities fall has some implications satchel, I am thinking it signals some kind of rotation…maybe into media stocks like Disney or Pharam..trying to figure it out myself. But a crash in commodities would have long term implications on inflation rates and monetary policy in Europe and elsewhere.
cooper:
we’re in complete agreement.
I understood the first part of your post. the second part of your disagreement was unclear to me. That is what I needed clarification on .
as I said, my original post that you were “exact opposite” about was poorly written, and it conveyed the wrong message.
my message was meant to be:
1. many ARMs are tied to LIBOR and not 10 year treasuryes
2. those arms MAY NOT go down in the future (yes they are down now, but we don’t know what they will be in the future)
3. but bears need to be careful because the govt is doing everything in its power to bring down mortgage rates
4. they may or may not succeed at doing this.
5. they may try nationalization of the mortgage market in order to succeed at this game. They have already begun a pseudo-nationalization by using Fannie/Freddie/Ginnie/FHA/TSLF/TAF etc. I anticipate a true nationalization when/if these organizations flounder.
6. nationalizing the mortgage market may or may not “work” at bringing down mortgage payments, but will fail at solving the credit crunch as solvency is the issue, not liquidity.
I can easily forseee strikingly higher mortgage rates going forward IF THINGS WERE LEFT TO THE MARKET. Since they are not, and there will be/has been massive govt intervention, then we may see lower rates.
The government can absolutely control ARM rates, but the typical 30 year mortgage market has a life of its own
not if the govt/Fed starts monetizing 30 year mortgages.
The government can absolutely control ARM rates, but the typical 30 year mortgage market has a life of its own
example of my concept:
Is there any question that CURRENT 30 year mortgage rates would be higher if there were no Fannie and Freddie (with their implicit gaurantee) and their access to cheaper-than-market capital?
this is an example of how government can directly control 30 year mortgage rates.
cooper & on the sidelines,
The flight into safety continues unabated at the front end of the curve. There are other, huge accidents waiting out there in credit land IMO, including ultimately the likely failure of Fannie/Freddie. As you know, I think there is no way we avoid a deflationary spiral, and so the commodities fall to me really only signifies that the hot money is leaving and the deleveraging of hedge funds and “risk trades” generally are being unwound. People remember Japan, that’s for sure, and the Fed so far is committed to not inflating the money supply. I do think there are a number of bodies left to be uncovered, but my guess is that we are more than 50% through the financial markets adjustment. But the real economy adjustment is just getting started – not even 10% through it in my opinion!
Also, keep an eye on China. I posted here back in December that a crash is coming in China, and it appears to be unfolding more or less on schedule. The malinvestment, poor structural economic choices, and general inexperience of the bankers, political class and business leaders in China will become obvious as it unwinds. For those reasons (recession in US, crash and severe slowdown – it will feel like a depression after growing at 12% – in China), I would not be aggressively long any commodities, except perhaps to have a little gold “just in case” and maybe some food-related (agricultural) plays! Also related to this, I am not super bearish on the dollar, except maybe against the Yen (but beware another Louvre-style accord a la 1987 that puts a floor under $/yen), because I think – just as in Japan in the 1990s, a credit deflation is bullish the creditor country currency, as currency/cash become scarce as it is sought to repay debt. I am a little surprised that the dollar has been as weak as it has at this stage in the credit unwind process, and to me that tells me that the process still has a ways to go. IMO, one should ignore the numerous “bottom callers” in financials and real estate, etc. They are always wrong. Sentiment is not nearly as bad as it can (and will) get.
I do think that the Fed is basically an inflation machine under most circumstances, but as you know from my rantings, I think at this point it is engineering a deflation in order to reduce debt levels in the US. Once we get into late 2009/2010, I’m guessing that enough debt will have been destroyed that the Fed will be able to get back to its evil 1960s/1970s ways of money creation, because at that point there will be less debt, much of the mortgage problem will be behind us, and there will be no big deal if interest rates rise. It’s always so hard to figure out what is REALLY going on when you have a nontransparent conspiracy between the USG and the FED, so I tend to just ignore what they are saying and look at the aggregates that they control, namely adjusted monetary base and (to a lesser degree) M1. When they start printing, we’ll see it there. Until then, I will stick with the deflation trades (long treasuries, neutral/short equities using options (mostly calendar spreads with downside bias, long long-dated equity volatility against short near term vol), NO US credit exposure, balanced fx exposure, a little gold, NO real estate, etc.). I know there is some jargon in there – which is intentional – I wouldn’t want to recommend anyone to play in options and these sorts of investment ideas unless he or she is VERY familiar with that sort of trading – in which case, none of that would be gibberish!
For most people, I think that the primary goal for the next year or two should be capital preservation, and a mix of treasuries, some foreign bond exposure, a little gold, fairly light positions in US and foreign equities (especially Asia) and just plain old cash should do just fine! Ex SF-er’s exhortations to not be too leveraged – especially with an illiquid house unless you are well settled and do not intend to move for a long time – make sense to me as well. After the coming adjustment, I would be inclined to get long Asian equities in a much bigger way, but again that’s a year or two down the road. I see US equities as being in a “generational” lull, and would not expect real returns over the next decade (but there will be tradable wiggles there!). This would not be surprising for equities to return basically nothing over a 20 year period, despite what the foolish pumpers say. Look at 1929-54, or 1966-1982, for recent examples of basically no returns (or negative). If you broaden out your range of thinking about equities, you would also find many other 20-50 year periods of no return in places like Germany pre-WWI and England following the bursting of the South Seas bubble (it took basically until the railroad craze some 80-100 years later before equities got going again there!).
@ex SF-er
That was me. I am aware that most ARM’s are tied to LIBOR (as mine is). My comment was not just to ARM’s since most HELOC’s are tied to a bank’s Prime. The Prime is much more directly tied to the Fed Rate. The comment was that for those with existing adjustable rate loans (both ARM’s and HELOC’s), the Fed Rate cuts have been having the effect of reducing their payments.
It isn’t helping new borrowers or refinances as much (since it hasn’t lowered the 30 year fixed as much) but it is helping people to afford their existing homes. Hence the comment that part of the Fed’s plan is try to prevent foreclosures and that part might be working.
According to bankrate.com (can’t vouch for the source), almost half of all ARM’s are tied to the one year treasury constant maturity series. My ARM is tied to this index, which was at 1.66% before the last fed rate cut, and stayed below 2% for almost 2 years the last time the fed cut rates to 1%. The CMT was at 5% a year ago, so the fed rate cuts have had a dramatic effect on resets tied to those ARM’s. WAMU was offering HELOC’s for prime minus 1.25% a while ago but I don’t know if that is still available- that would be about a 4% rate once the latest cut is factored in.
@Satchel. What about this argument. The Fed has essentially taken the risk out of the investment banks balance sheets. This combined with existing writedowns has slowed or even stopped the slide in these companies. Except maybe some Swiss banks and maybe a surprise or two from MER, it seems contained. This plus a rise in the dollar pushes commodity prices down. Given all inflation right now is coming from these areas it will push us into DE-FLATION concerns. So the Fed and ECB and BOE cut aggressively. This should result in US equities outperforming dramatically. Emerging markets would then under perform in that environment–at least those that are commidity based. Brazil-Russia and China. Some –like India or Turkey might do alright. I’m not saying that’s my preferred scenario but its one I am thinking about now.
Rillion:
yes, like I said above, I misunderstood what you were saying and then posted a cryptic message that has gotten me in a lot of trouble! I was doing 2 things at once while posting here, and now I regret it!
I hope I can delete this entire thread! I’m an idiot!!!
🙂