Archive for February, 2007

What’s Bad For Stocks Can Be Good For Rates

David Kosmecki | February 28, 2007 in Uncategorized | Comments (0)

After the most major meltdown in U.S. stock trading since September 17, 2001, markets appear to be recovering this morning.

This should reverse the drop in mortgage rates we saw towards the end of the day yesterday.

To understand why mortgage rates go down when stock markets suddenly fall, we must look at the investor’s perspective.

When stocks sell off, investors are suddenly holding cash and so they look for places to park those dollars. Bonds are usually the beneficiary which is why major stock market drops are usually accompanied by large gains in bonds.

Because mortgage rates are born from the prices of mortgage-backed securities — a type of bond — days like yesterday are good for home owners and home owners-to-be. As expected, mortgage rates fell late yesterday and have extended those decreases into today.

As stocks recover, however, dollars are pulled from bonds and back into stocks, pushing rates upward.

So far this morning, about half of yesterday’s gains have already been erased.

More “Safe Haven” Buying Drops Mortgage Rates

David Kosmecki | February 27, 2007 in Uncategorized | Comments (0)

The Flight-to-Quality continues in the bond markets.

Iran said today that the suspension of its uranium enrichment program “will never happen”, fueling speculation that an international stand-off is pending. The United States has sent additional aircraft carriers to the Gulf in response.

Normally, this action is enough to frighten markets into bonds by itself, but a suicide bomber’s attack on a U.S. military base in Afghanistan playing host to Vice President Cheney is adding an extra jolt. 14 people died in the blast.

Mortgage-backed securities (and mortgage rate shoppers) are benefitting from the international uncertainty this morning. But, eith a slew of market-moving data due Wednesday and Thursday, expect rates to return to higher levels as traders take profits toward the end of the day.

Iran won’t halt atomic work, snubs big powers
Edmund Blair
Reuters, February 27, 2007 9:19 a.m.

Cox and Forkum Editorial Cartoons
February 25, 2007

The Week In Review (February 26, 2007) : What To Watch For

David Kosmecki | February 26, 2007 in Uncategorized | Comments (0)

Aside from CPI, last week was quiet on the economic data front. Traders used the week to catch their breath and look around a bit at market conditions. They liked what they saw and strong demand for bonds pushed mortgage rates down.

This week, the big Market Mover Day is Thursday, coinciding with the release of the Personal Consumption Expenditures index. PCE is a lot like last week’s CPI except that it subtracts out sales made to business and governments. This helps to paint a more accurate picture of consumer spending.

There is debate over whether PCE is better as an inflationary gauge than CPI, but the Fed has gone on record as stating it’s a measurement in which they have keen interest. Specifically, this is because PCE isolates consumers and the cost pressures on their lives.

Year-over-year, PCE is expected to show an increase 2.3%. If the actual number is lower, expect mortgage rates to fall. If it is higher, expect rates to increase.

How Iran’s Uranium Enrichment Program Changes Mortgage Rates

David Kosmecki | February 23, 2007 in Uncategorized | Comments (0)

UN Logo

In defiance of the UN Security Council, Iran is taking another step towards successfully building a nuclear weapon.

Yesterday, it was reported by the International Atomic Energy Agency that Iran expanded its ability to create nuclear weapons and that it plans to “turn on” at least 1,000 uranium-enrichment centrifuges.

Internationally, this decision creates questions (and fears) about Iran and its nuclear ambition. Traders respond to this by moving their money from risky economies to strong economies. Strong economies better protect and preserve investment dollars when global politics get “scary”.

A related strategy is when investors sell small cap stocks in favor of DJIA stocks during a market swoon. The jargon for this buying and selling approach is “Safe Haven” buying.

For mortgage rates, this is a good thing. The United States economy is considered a Safe Haven and investors tend to snap up dollar-denominated securities in the presence of political uncertainty.

More buyers of mortgage-backed securities means that the prices go up. And, as is always the case with bonds, higher prices mean lower yields/rates.

How Decimal Points Mess With Markets

David Kosmecki | February 22, 2007 in Uncategorized | Comments (0)

A little known fact about yesterday’s CPI numbers: they weren’t as inflationary as you would have otherwise thought. It all comes down to decimals and rounding.

What The Expectations Were

  • CPI: 0.1% increase in January
  • Core CPI: 0.2% increase in January

What The Headlines Reported

  • CPI: 0.2% increase in January
  • Core CPI: 0.3% increase in January

What The Actual Figures Were

  • CPI: 0.174% increase in January
  • Core CPI: 0.256% increase in January

The rounding from three decimals places to one can really warp the interpretation of data. After all, without three decimal reporting, Ty Cobb is a career .4 hitter and Ted Williams is no more special than Ginger Beaumont at .3.

Interpreting economic growth requires precision and the current rounding-in-reporting method is anything but.

CPI Is Higher And Contained In Comfort Range

David Kosmecki | February 21, 2007 in Uncategorized | Comments (0)

Markets did not like today’s Consumer Price Index figures which came in higher than expected. However, the downbeat mood this morning is not enough to reverse the recent downward trend in mortgage rates.

The chart at right shows CPI over the past two years and the band collars the Fed’s articulated “comfort zone” for inflation.

The far left of the chart represents the few months before the Federal Reserve began raising the Fed Funds Rate from 1.000%.

The second highest peak represents where the Fed made its last FFR increase to 5.250%.

The Fed has not changed the FFR since June 2006 while it waits to see the impacts of its prior rate hikes. According to the chart, the hikes helped to bring CPI back to a comfortable range and today’s increase still registered within tolerance levels.

This is one reason why the surprise upside to CPI is not causing damage to mortgage rate shoppers.

Consumer Prices Jump 0.2% On Higher Food, Medical Costs
Jeff Bater
Wall Street Journal Online, February 21, 2007 9:37 a.m.

The Week In Review (February 19, 2007) : What To Watch For

David Kosmecki | February 20, 2007 in Uncategorized | Comments (0)

Fed Chairman Ben Bernanke carried the biggest stick in the mortgage rate market last week. His “Goldilocks” testimony before the Senate Banking Committee spoke of favorable growth and subsiding inflation.

Markets expected a harsher tone from Bearded Ben and that is why rates dropped post-testimony — the expectation diminished that the Fed will raise the Fed Funds Rate in 2007.

This week, the Consumer Price Index (CPI) is expected to show a slowing down as well. CPI measures inflation on a consumer level, evaluating costs of domestically- and foreign-produced goods for American consumers.

An elevated CPI is viewed as inflationary because when everyday items are more expensive, the relative value of a dollar is lower.

CPI is important as a broad gauge, but not as important as the more predictive, more stable sub-component of CPI called Core CPI. Core CPI is the same as CPI except that it ignores the highly volatile prices of food and energy.

Core CPI is expected to register a 0.2% increase. If the actual figure comes in lower (and supports Bernanke’s testimony), expect mortgage rates to fall further.

Why Long-Term Mortgage Rates Are The Same As Short-Term Mortgage Rates

David Kosmecki | February 16, 2007 in Uncategorized | Comments (0)

Interest rates are currently inverted, a market situation in which the longer you commit to lending your money, the less your return on investment. It’s counter-intuitive so let’s delve a little deeper.

Imagine if a friend asked you to borrow money for two years and you charged him interest on that money. There are some risks in lending:

  1. The risk of not getting paid back
  2. The risk that the money could have earned more for you somewhere else
  3. The risk that the value of the dollar will be lower when you get your money back

The more risk you take, the higher the interest rate you should expect on your money. This is Risk versus Return at its finest. So, if that same friend wanted the money for 10 years instead of two years, you would expect a higher return because your risk is higher on all of the points above.

  1. He could lose his ability to repay you in those 10 years
  2. You could have had countless other investment opportunities over those 10 years
  3. The value of the dollar could swing wildly in those 10 years

In an inverted yield curve scenario, the 10 year program actually pays less than the two year. The theoretical risk is much, much higher over 10 years, but the "reward" is lower.

The inverted yield curve is one of the big reasons why today’s short-term ARM and long-term fixed mortgage rates show very little difference.

Why Nations Care What Ben Bernanke Says To The U.S. Congress

David Kosmecki | February 15, 2007 in Uncategorized | Comments (0)

The markets continue to show their appreciation for Fed Chairman Bernanke’s testimony yesterday and mortgage rates are falling in response.

So, why do the Chairman’s words hold such sway over global markets? Simple. Buying and selling U.S. dollar-denominated securities is an integral part of central banking fiscal management policies worldwide. When the Chairman says that inflation is subsiding, it really means that the dollar will not be expected to lose value.

That’s what inflation is, after all. It’s the erosion of the dollar’s purchasing power.

If the dollar is expected to lose value, countries that hold U.S. dollars in reserve are likely to sell them to stave off losses. Selling dollars introduces more supply into the marketplace and more supply leads to lower values.

Ben Bernanke’s testimony yesterday (temporarily) put to rest the whispers about the Fed being scared of runaway inflation. Markets are adjusting their expectations — and their portfolios — to plan for a stronger dollar in the months ahead.

Markets React To Bernanke’s Testimony

David Kosmecki | February 14, 2007 in Uncategorized | Comments (0)

Addressing the Senate Banking Committee this morning, Fed Chairman Ben Bernanke gave the speech that most people expected: The current monetary policy (read: Fed Funds Rate) is at a level that both sustains economic growth, and tempers inflation pressures.

In addition, inflation expectations "appear to have remain contained," Bernanke said. He called that "encouraging" and this is a good sign for markets because inflation can be a Self-Fulfilling Prophecy. When people believe that inflation will happen, they prepare for inflation, and in doing so, it makes inflation actually happen.

A large part of the Fed’s role is to manage inflation expectations and Bernanke seems pleased with the back-and-forth between his team and global investors.

Bernanke prepared remarks also alluded to his concern that inflation won’t subside as expected. He cautioned that the Federal Reserve is "prepared to take action", if necessary. Despite that statement, however, markets are generally pleased with the testimony and mortgage rates are falling this morning.