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Posted by: Bruce & Sandy Soli | October 22, 2009

Economic Update From Steve Peterson

Rates as of today are 4.875% with ½ point, or 5.0% with no points for a conforming 30 year fixed (Rates quoted assume excellent credit, primary or secondary residence, 20% down for a single family dwelling and 25% down for condo.).

The major interest rates have changed little over the past week, rising only a few basis points. It begins to seem as if we can float gradually toward economic recovery for a long time, even watching the stock markets move higher and higher. I am worried, though. Because the growth of many investments doesn’t make great economic sense, it’s difficult not to worry a bit about the possibility of a correction. Even Treasury securities seem “oversold,” in that foreign central banks have purchased more than the rational mind can account for.

It’s still very possible, of course, that we’ll continue to see improvements to the overall economy, as rates remain low and investment returns are driven higher. One can imagine, increasingly, the pent-up demand for a relatively strong season of gift purchases in December. But the fundamentals still aren’t quite in place for such exuberance, and it grows more and more likely that we’ll pause for a time and watch the markets correct.

It’s a good time for extra caution, but it’s also still a fabulous time to buy residential real estate in all price categories–and that’s a fact that would help to pull us out of a correction, if one comes along.

KEY INDICATORS

 

Gold $1055.40/ounce [down]

Crude Oil (Brent) $76.65/brl [up]

U.S. Dollar to…

    Euro .6708 [down]

    Japanese Yen 90.86 [up]

6-mo Treasury Bill Yield 0.16%

10-yr Treasury Note Yield 3.34%

[6-mo up 2 bps, 10-yr up 3 bps]

11th Dist Cost of Funds 1.412%[-]

30-yr Fixed-rate Mortgage 5.41%

15-yr Fixed-rate Mortgage 4.84%

1-yr ARM 4.61%

[HSH averages rates: 30-yr

up 8 bps,15-yr up 7 bps; 1-yr ARM down 12 bps]

 

Mortgage Bankers Association Mortgage Applications Index

week ending 10/9

  Overall

    742.9 (down 1.8%; up 16.4%

the week prior)

  Purchase Money Loans

    290.9 (down 5%; up 13.2%

            the week prior)

  Refinancing Loans

    3374.6 (down 0.1%; up 18.2%

 the week prior)

 

Jobless Claims 10/10

    514,000 – prior week 521,000 – continuing claims fell to 5.992 m

 

NAHB Housing Market Index Oct

    Down from 19 (Sept) to 18

 

Housing Starts Sept

    Up 0.5% – SFR starts up 3.9%

 

Producer Price Index (PPI) Sept

    Down 0.6% (core down 0.1%) –

Consumer Price Index (CPI) up 0.2% (core also up 0.2%)

 

Weekly Commentary

 

“This is all about the very dramatic turn in the global financial context—the reactivation of credit markets; the return of investors to risk after a historical flight from risk.” [Michael Gavin, Barclay’s Capital, quoted in The Wall Street Journal]

 

Beneath the relatively gentle movement of interest rates recently has been a remarkable build-up of profits among such surprising investment instruments as junk bonds. Over the past year, holders of junk bonds have watched their value increase by 50.23%. The obvious question: Why?

 

Mr. Gavin, quoted above, notes that the pendulum has swung and investors are hungry for yield and willing to take on risk. By and large, he sees it as a good thing. But it is also a very confusing thing. And there’s more.

 

Over the past five weeks, the dollar amount of U.S. Treasury securities held by foreign central banks has grown by a remarkable $48.55 billion dollars. At this point, foreign central banks hold a record $2.098 trillion in Treasury securities. Again: Why?

 

Why do they keep buying in such volume—when American interest rates are remarkably low and the exchange value of the dollar continues to decline, meaning that investors lose some of their profits simply by exchanging them back into their home country currency?

 

One answer: There is still great uncertainty about the near- to mid-term course the economy will take, and thus Treasury securities still look like a safe haven (just as, clearly, gold seems a safe haven and is therefore growing in value). But that wouldn’t explain the appreciation rate junk bonds have experienced. Perhaps the fact that there are relatively few junk bonds now available for purchase and those taking advantage of borrowing at low American interest rates might be putting their borrowed funds into junk bonds, which provide a much higher yield, might explain the gains. Buy low, invest in something bearing a higher yield: That is the “carry trade,” and it is rampant today.

 

When international investors are willing to risk losing some of their already meager yield by buying Treasury securities and are also willing to take on great risks at the same time by buying junk bonds, one wonders if the first category of purchasers involves the investors’ own money and the second involves other people’s money (OPM—generally borrowed funds). Whatever the case, it is difficult to remain fully confident in this market. Caution is advisable.


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