| Yes, mortgage rates correllate with bond rates, largely because they
are competing instruments; more so these days with mortgages being
packaged and sold in dazzling varieties.
I think we're nearing a low in rates (high in bonds) both because of
cyclic tendencies (peak late May) and FEDamentals. There is a tendency
for the FED to buy bonds the week after Treasury auctions -- this week --
to help primary dealers unload, I mean sell off, their inventory, at a
profit. Primary dealers MUST bid at the auction and can end up with
a plateful of unwanted debt. I.e., it's a payoff. Or so it appears.
Now is a good time for this. Rates will not go substantially lower
while the upside risk is much larger, just based on the bond trading
range for 1991-1992. Furthermore I can't help think lurking out there
is another international surprise, maybe not as bad as Iraq/Kuwait but
enough to scare the bond market. All the good news is already factored
into the market and any surprises are likely to be unpleasant. (This
has been a paid apolitical opinion).
John
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Great. Wow, sound like a very tight relationship indeed.
More on this FED purchase, please : does it happen on one day, over the whole
week, more towards the end of the week, or more towards the beginning of the
week?
In other words, can one say that since bonds are doing well so far this week,
they may do better the rest of week?
Again, here I am with a flexible lock-in period, and a differnce in an eighth
of a point is an awful lot of bucks on a 30 year mortgage...
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| Last year (actual May 30, 1991) an individual asked the following question:
May 30, 1991
"At this time, short term interest rates are nearing, if not
at, a 5 year low. A prudent investor should have a balanced
portfolio with some percentage of that portfolio in bonds.
Doesn't the current interest rate suggest reducing the
allocation in bonds and perhaps shifting to some other
investment vehicle? When interest rates inch up again, bond
prices will obviously go down."
History has shown that NOT reducing allocations to bonds would have
been the best strategy. While John has excellent points, long
term bonds are still about two points higher than the 5-6% that's
been the norm for the past 50 years. Barrons (4/13/92) has a chart
that shows the mortgage rates and corporate bond rate.
Some food for thought: Fleet, BayBank, and Shawmut are all
offering 6.5% home equity loans for approximately one year. They must
believe the interest rate risk is miminal to be making such an offer.
Of course they (and I) could be wrong and John could be right.
Gim
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| .2> More on this FED purchase, please : does it happen on one day, over the whole
.2> week, more towards the end of the week, or more towards the beginning of the
I don't think it's that predictable, but I would guess more towards the
start of the week. It's not the sort of thing that is accompanied by
fanfares and spotlights.
.2> Again, here I am with a flexible lock-in period, and a differnce in an eighth
.2> of a point is an awful lot of bucks on a 30 year mortgage...
This is like trading futures. One algorithm is to wait for the first
rate uptick and lock in at that point, with a timeout of, say, May 27.
Nobody can call the exact low or high, so don't think there's any skill
involved here.
Another consideration is holidays. The FED usually buys bonds before
most holidays to goose the cash holdings of member banks, figuring on
higher public cash withdrawals for holiday spending. I don't know if this
induces lower mortgage rates (FED buying bonds increases the demand for
bonds thus raising the price therefore lowering interest rates), but it
might be worth looking at some old Barron's to see.
.3> Last year (actual May 30, 1991) an individual asked the following question:
[...]
.3> History has shown that NOT reducing allocations to bonds would have
.3> been the best strategy.
I do not understand the basis for this claim. My research shows that
both stocks and bonds have returned a tad over 12% (total return, both
dividend/interest and appreciation) over the past year, mid-May to mid-May.
Compare this to Gold (-8.7%), Corn (-2.5%) and Wheat (+14%). Clearly,
reducing allocations to Bonds and increasing allocations to Wheat would
have been the best strategy. Please supply some evidence to support
your claims.
.3> While John has excellent points, long
.3> term bonds are still about two points higher than the 5-6% that's
.3> been the norm for the past 50 years. Barrons (4/13/92) has a chart
Comparing today's environment to the 1950s, when the dollar was backed
by gold, the U.S. was the undisputed industrial leader of the world,
deficits were tiny and occasionally there was a surplus, all seems a bit
on the Pollyanish side. If you're going to do that then I've got to
point out that we've also seen long bond rates over 16%, back when
there was a Southern ex-governer in the White House. You decide which
future outcome (5%, 16%) is more likely to happen first. Also please
explain how that is relevant for someone looking to obtain the best
mortgage rate in the reasonably near future.
.3> Some food for thought: Fleet, BayBank, and Shawmut are all
.3> offering 6.5% home equity loans for approximately one year. They must
.3> believe the interest rate risk is miminal to be making such an offer.
Then again, they have futures markets to hedge in, and the FED to bail
them out if they are wrong. But there's nothing to argue about here,
if I had plenty of cash to lend I wouldn't mind getting 6.5% on a
reasonably safe 1 year loan. As with all banks, I reserve the right
to change that decision as the future unfolds.
.3> Of course they (and I) could be wrong and John could be right.
Right about what?
John
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| > Clearly,
> reducing allocations to Bonds and increasing allocations to Wheat would
> have been the best strategy.
In this particular case, the choices being considered were reducing
allocation to bonds or increasing allocation to cash/cash equivalent.
I should have phased the sentence more accurately. Wheat was never
in consideration.
> If you're going to do that then I've got to
> point out that we've also seen long bond rates over 16%, back when
> there was a Southern ex-governer in the White House. You decide which
> future outcome (5%, 16%) is more likely to happen first.
Did long term bonds really hit 16%? I thought the top was 13-14% (I'm
not sure on this.) Nonetheless, the rates were very high.
> Also please
> explain how that is relevant for someone looking to obtain the best
> mortgage rate in the reasonably near future.
> But there's nothing to argue about here,
> if I had plenty of cash to lend I wouldn't mind getting 6.5% on a
> reasonably safe 1 year loan. As with all banks, I reserve the right
> to change that decision as the future unfolds.
Exactly my point - there's plenty of cash because the country is moving
away from this consumption binge. Look at the SAVE plan as a indicator.
Employees are finally saving more.
Interest rates are in part determined by propensity to consume today vs
saving for future consumption. My bet is that long term rates will drop
over the next 6 months.
Gim
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| Here's a good article which summarizes the various forms of
schizophrenia which influences the bond market. I thought bond rates were
somehow less reactionary to different influences than were other consumer
lending rates: nope. Also, I was surprised to read that there is a real
possibility that the fed will once again drop it rate. Fwiw, the housing starts
anticipated by the article came out way under expectations.
Anyhow, I decided not to hold out for the feds, so I locked in my
Mortgage rate at 8.5% for a 15 year fixed with no points.
Cheers
Mike
Article 148
From: [email protected] (FRANK SCHNAUE, UPI Business Writer)
Newsgroups: clari.biz.invest,clari.biz.finance,clari.biz.economy,clari.biz.top
Subject: Bonds rise despite confusion over interest rates
Date: 15 May 92 23:24:18 GMT
NEW YORK (UPI) -- Prices of U.S. government securities rose during the
week on the conviction inflation is under control.
The market's bellwether security, the 30-year Treasury, which jumped
1-10/32 last week, tacked on another full point. The issue's yield,
which moves in the opposite direction of its price, eased to 7.81
percent.
Analysts said the market pushed higher on some great inflation news
despite concerns that the Federal Reserve would ease interest rates.
The Producer Price Index and the Consumer Price Index were each up a
mild 0.2 percent last month, according to reports released during the
week by the government.
Talk of an imminent easing of interest rates persisted through most
of the week despite action by the Fed that squelched chances that a move
to lower short-term rates was currently underway.
The Fed aggressively added reserves though overnight system
repurchase agreements, an operation that often heralds a rate cut.
The Fed's move initially pushed the key Fed Funds rate to 3.5
percent, below its current target of 3.75 percent, further suggesting an
easing of monetary policy, analysts said.
``But the Fed continued to add reserves through less aggressive
means, an indication to the market the move was to remedy a shortage of
funds,'' said Trude Latimer, market strategist at Josephthal Lyon &
Ross.
``But at the same time the contined action became a denial that there
was any policy significance to its actions,'' the analyst said.
``The Fed made some gutsy calls during the week, and it is unsettling
for the market looking to the Fed for direction,'' said Nancy Kimelman,
chief economist for Thomson Financial Services.
``If the Fed wants to ease, they know the numbers of the press and
everyone else. If they do not want to ease, why are they executing
operations that are ambiguous?'' she said.
``After all, everyone knows the Fed is following an interest rate
target. There should be some action,'' Kimelman added.
Nonetheless, market players have not given up on a rate cut.
``The door is still open for an easing, but my guess is that they
will not do it until we see a weaker economic data,'' said Latimer.
Meanwhile traders said ripples of the Olympia & York bankruptcy
filing sparked a ``flight to quality bid'' in the short end.
``One moment the market is focusing on the Fed and the next moment
its focusing on Olympia & York and its impact on the banking system, and
then the next moment its focusing on economic data,'' Latimer added.
Looking ahead, players will be watching next Tuesday's Commerce
Department report on housing starts during April. In March, starts
increased 6.4 percent to a seasonally adjusted 1.365 million yearly
rate.
Forecasters are projecting a setback in new building activity in
April, as starts are expected to decline roughly 6 percent.
Additionally on Tuesday, the Federal Open Market Committee is
expected to met to set the Federal Reserve System's monetary policy for
the next six weeks, deciding whether to push interest rates still lower
to stimulate the nation's sluggish economy.
Later in the week, Commerce will report on the U.S. merchandise trade
deficit for March. In February, the United States incurred a $3.383
billion trade deficit.
Forecasters are expecting the trade deficit to widen to around $4
billion.
Additionally, the market will be facing several auctions next week as
fresh paper will be issued when the Treasury sells some $14.75 billion
in new two-year notes and $10.25 billion in new five-year notes.
In trading, the price of the 30-year Treasury bond closed Friday at
102 6/32 for a yield of 7.81 percent, compared with 101-6/32 for a yield
of 7.90 percent the week before. Lehman Brothers' long-term bond index
ended at 1384.04, up from 1373.47 a week earlier.
The 10-year Treasury note rose to 101-17/32, pushing its yield down
to 7.28 percent, compared with 100 21/32, or a yield of 7.40 percent
last week.
Seven-year notes rose to 100-8/32 to yield 6.95 percent from 99-
18/32, or a yield of 7.08 percent a week earlier.
The 5-year note rose to 101-6/32 to yield 6.59, compared with 100-
21/32, or a yield of 6.72 percent last week.
Three-year notes moved up to 100-15/32 to yield 5.70 vs. 100-1/32 the
prior week. Two-year Treasury notes rose to 100-18/32 to yield 5.06
percent vs. 100-7/32 a week earlier.
The 6-month Treasury bills were discounted at a rate of 3.68 percent
to yield 3.80 percent vs. 3.62 percent the week before, while 3-month T-
bills ended at a rate of 3.58 to yield 3.66 percent, vs 3.62 percent the
week before.
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