Bonds took another beating today as investors shunned safe haven instruments in exchange for riskier investments. Mortgage Bonds did trade briefly higher at the open but fell off a cliff after news from China that manufacturing in that country was at a 3 month high signaling that the global recession may be coming to an end.
In the past week we have seen the average mortgage rate jump a half point higher! 5.25% is certainly a great low rate, but 4.75% was available only a few days ago. Bond yields are surging because the economy is showing signs of improvement such as the June 1st report showing manufacturing shrank as at a slower pace and construction spending rose. Let’s hold off on the champagne for now because manufacturing shrank, but not as much as expected. Another reason that bond traders are getting jittery is because of the fear of inflation. Bonds have fixed rates and their value erodes with inflation. Conversely to stocks, bond yields increase whenever bonds are sold and yields lower when bought. According to Nobel Prize winning economist, Paul Krugman in his May 28th column The Big Inflation Scare, the threat of inflation is unfounded in the current economic environment. Krugman points out the lack of inflation right now. Prices are down from a year ago and deflation has more potential than inflation (as I write this blog on June 1st, 2009). Krugman also indicates that even though the Fed is printing money and buying debt, there still isn’t a precedent for inflation as banks have been repaying the Fed. Plus the banks are sitting on reserves rather than lending out their money. Is the economy roaring back? Hardly! Maybe the eyes of the financial markets. Those guys read the tea leaves differently than the rank and file. I still see economic issues from my vantage point on the front lines of the housing market. Credit is still tight, property values are groping to level off and now rates are increasing. The job market is still lousy and the wave of layoffs continues to build.
As for the mortgage market, today’s Wall Street Journal suggests that low rates may be disappearing fast. The article goes on to suggest that the rise in interest could be ominous for the housing market at such a precarious time for our economy. The low rates and tax credits for first time home buyers has stimulated the housing market but higher rates could throw a wrench into the recovery. When rates go down signifcantly, refinancing your home could save hundreds of dollars a year. Will the lower rates come back? It’s hard to say. We saw some significant swing in bond yields last week. It could go down, just as fast as it went up so strap on your seat belts. It is likely that we will see rates settle down in the weeks to come, but it would be unlikely for them to reach the 4.75% we saw last week. Stay tuned and visit my site, www.livingintucson.com for timely commentaries on the mortgage market. Call David Wolsky at 520-977-3300 or email me at david@davidwolsky.com for all of your Tucson mortgage needs.
