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With mortgage rates about as low as they've ever been, it's time to refinance if you haven't already and if you can. 10-year Treasury yields are already up about 80 bps from their lows, and if they continue to move higher then mortgage rates will be under pressure to rise. Refinancing activity is already well above its historic levels, but not quite as strong as we've seen at other times when Treasury yields dipped to new lows. Undoubtedly this has to do with the fact that many homeowners who would like to refinance can't, because they don't have sufficient equity in their homes.
3 comments:
Scott,
I'm concerned about the rising rates.
1) The prospects of higher interest rates (particularly mortgage rates) does'nt help the recovery. Housing still has plenty of inventory to work off. Higher rates will only make the pain last longer.
2) I'd like to believe the rising Treasury yields are an early indication of a renewed willingness to take on more risk. However, I'm worried it has more to do with anticipating the money we need to borrow for this stimulus package. The probability of issuing 30 year bonds again will only hurt rates more (but we probably need to term some of this debt out). Stocks certainly don't seem to be where the money is going.
2) How do you see wage inflation developing given the current circumstances?
3) We have heard plenty about the indebtedness of the US consumer and how the currently broken non-banks lent three of the four dollars borrowed by the consumer during the past 10 years of debt build up. How does the roll of non-bank lending compare to the rest of the world?
4) What are your thoughts on the current strategy to fix the banks?
Thanks so much for your sharing your great observations. A must daily read.
Steve: the only interest rate that is capable (in theory but not always in practice) is the rate set by the Federal Reserve--the overnight federal funds rate. All other rates are set by the market, and the market in turn is the sum total of all the things going on and expected to occur in the economy.
Treasury yields had fallen to all-time lows at the end of last year because a) economic activity slowed sharply, b) the market expected things to get worse, and c) the market expected an extended period of falling prices.
So to the extent the yields rise, that reflects a reversal of all those ugly developments. Higher yields mean the future looks brighter (or less horrible), and that the risk of a big deflation are declining.
Mortgage rates are about as low as they have ever been, and even if they rose a point that would not kill a nascent housing recovery, that would instead be a reflection of renewed strength in housing.
The prospect of trillion dollar deficits has not pushed up bond prices much, in my opinion, because the market is still deeply pessimistic about the economy's prospects and is betting that returns on Treasuries will beat the returns on most everything else.
Once the economic pessimism lifts, however, then Treasury yields could really get a boost to the upside.
Wage inflation will ultimately be a function of the monetary inflation that the Fed is in the process of using in an attempt to boost growth. More money in circulation will support a growing economy and rising prices for goods, services, and wages. Wages however will be the last to feel the effects of inflation. That is why inflation is always bad for the little guy, because his income almost always lags the rise in prices.
I'm not enough of a banking expert to say anything useful about the government's efforts to fix the banks, other than it does not appear to have been successful. I hope they try other things, including a change to the mark to market rules.
Steve: the only interest rate that is capable (in theory but not always in practice) is the rate set by the Federal Reserve--the overnight federal funds rate. All other rates are set by the market, and the market in turn is the sum total of all the things going on and expected to occur in the economy.
Treasury yields had fallen to all-time lows at the end of last year because a) economic activity slowed sharply, b) the market expected things to get worse, and c) the market expected an extended period of falling prices.
So to the extent the yields rise, that reflects a reversal of all those ugly developments. Higher yields mean the future looks brighter (or less horrible), and that the risk of a big deflation are declining.
Mortgage rates are about as low as they have ever been, and even if they rose a point that would not kill a nascent housing recovery, that would instead be a reflection of renewed strength in housing.
The prospect of trillion dollar deficits has not pushed up bond prices much, in my opinion, because the market is still deeply pessimistic about the economy's prospects and is betting that returns on Treasuries will beat the returns on most everything else.
Once the economic pessimism lifts, however, then Treasury yields could really get a boost to the upside.
Wage inflation will ultimately be a function of the monetary inflation that the Fed is in the process of using in an attempt to boost growth. More money in circulation will support a growing economy and rising prices for goods, services, and wages. Wages however will be the last to feel the effects of inflation. That is why inflation is always bad for the little guy, because his income almost always lags the rise in prices.
I'm not enough of a banking expert to say anything useful about the government's efforts to fix the banks, other than it does not appear to have been successful. I hope they try other things, including a change to the mark to market rules.
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