Living In Tucson Blog

 Monday, June 8, 2009 was another brutal day for the bond market. Bonds have been selling and yields have been climbing since May 21^st. We have seen 30 year fixed rate mortgages go up about .75% in rate from 4.75% to 5.5%! There are many reasons, opinions and theories explaining the sudden rise in mortgage rates. Here is some “expert” analysis:

According to Robert Lenzner for Forbes, The bear market ended March 9^th and the end of the worst recession since the 1930s or the mid 1970s is plainly in sight. The yield curve – the difference between short-term and long-term securities – usually widens in advance of an economic recovery, and it has done so. Housing, the genesis of the crisis, is showing signs of improvement and even amelioration. Pending sales were up 6.7% in April, even if prices are still in the tank.

“There are two legs to that story, both of them bad. As yields on the 10-year go higher, the more attractive that investment would be to equity investors, so there is an asset allocation argument to be made,” said Art Hogan, chief market strategist at Jefferies & Co. “And, the Fed would like to keep yields lower, or at a favorable rate to help the recovery,” said Hogan.

“Rising interest rates will probably begin putting modest valuation pressure on the equity market as the yield on the 10-year Treasury note moves above 4%,” wrote Fred Dickson, chief market strategist, Davidson Companies, in a research note.

“Mortgage rates are heading higher as measured by Bankrate’s 30 year mortgage which rose to 5.45%. Rates are up 45 basis points in the last two weeks as Treasury rates have spiked higher. The recent rise in mortgage rates will probably dampen home sales and will certainly threaten stability in the consumer and household sector,” said Dan Greenhaus, an analyst at Miller Tabak Equity Strategy Group.

Federal Reserve Chairman Ben Bernanke, on June 3^rd, “In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” he told Congress. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.” 

 Here is this week’s forecast from the Mortgage Success Systems, LLC:

 “Bonds have traded lower recently, causing home loan rates to move higher. The reasons are many, but certainly due in part to all the extra Bond supply in the market. The Treasury has to have some way to pay for all the massive government stimulus plans, so Treasury auctions have been increasing dramatically – but the added supply is driving prices lower, with home loan rates moving higher. I will be watching closely to see if this trend continues.”

My observations… The bond market is way oversold and we should see a reversal soon as all of the impact from mortgage refinancing works its way through the system. There is a tremendous supply which is not keeping up with demand. Once all of the excess paper from the refinance boom is bought, the appetite for more supply will be there and yields will lower although more prognostications do not have rates as low as we have seen in recent months. Higher mortgage rates have had their impact on new mortgage applications. According to the Mortgage Bankers Association, refinance applications have dropped 24.1% to its lowest level since February 6. Purchase applications rose 4.3%. It appears that buyers are sensing prices leveling off and rates starting to climb. First time buyers want to take advantage of the $8000 tax credit before it runs out on November 30. The economy is showing signs of improvement. The stock market is up 37% since March! If you are interested in applying for a mortgage, call me, David Wolsky at 520-977-3300 during regular business hours. I have been origination mortgage since 1994 in Tucson, AZ.

For more infomation on the subject of T-Bills, read The Bond War – Why Paul Krugman and Niall Ferguson are hammering each other about T-Bill interest rates written by Daniel Gross and posted on www.slate.com. Article URL: http://www.slate.com/id/2219769/

Consumer confidence for April comes out Tuesday and it should increase for the second straight month.  Analysts believe it will hit 28.8 — up from 26 in March and February’s all-time low of 25.

One of the most important reports — advance 1^stquarter GDP — will be released Wednesday, and it’s expected to drop 4.9%.  However, two revisions follow and further declines are expected.  Final 4^thquarter GDP fell -6.3%.

Thursday is the busiest day for reports, beginning with first-time jobless claims for the week ended April 25.  They’ve been up and they’ve been down but remain too volatile to establish a trend.  Most economists, however, see job losses rising into next year.

We also get personal income and personal spending for March, which should be little changed from February.  Income is expected to fall 0.2%, matching the previous data.  Personal spending, however, could show slight improvement.  It is predicted to decline 0.1% — a tad better than the previous 0.2% dip.

The 1^stquarter employment cost index (ECI) should make no waves.  This index monitors the cost of wages, salaries and benefits paid by employers.  It is expected to rise 0.5%, just as it did in the 4^thquarter.

Thursday’s final report, the Chicago PMI manufacturing index for April, is expected to rise to 34 from 31.4.  This would be the first increase in several months.  The national counterpart of that index, the ISM report on manufacturing nationwide, follows on Friday and it, too, is predicted to rise to 38.0 from 36.3.  If these reports come in on target they would provide a small ray of hope for the hard-hit manufacturing sector.

Unfortunately, factory orders, which rose 1.8% in February, are expected to turn negative in March, falling 0.7%.  Friday’s last report, the University of Michigan/Reuters’ final consumer sentiment survey for April, should not change much.  Analysts believe it will come in at 61.5, which is a tad below the 61.9 of two weeks ago.

 This last week of the month features a number of key reports and a statement by the Fed after its Wednesday meeting.  Although no rate change is expected, the markets want to hear the Fed’s assessment of economic conditions, its outlook and its plans to buy more Treasuries in order to hold lending rates down.