Good Morning All-
I think it is
appropriate to say, How Low Will Rate's Go?
Honestly, probably
not much lower. So what is going on right now and why are the rates so low?
When the Fed rolled
out QE3 (Quantitative Easing 3) there number one goal was to purchase 60
billion a month in Mortgage Bonds to help push rates lower and lower. Basically
look at it from sheer supply and demand. What happened in 2005 with the housing
market? The more demand there was for houses, the higher the prices went. Right
now the only demand is the Fed. They are the one's pushing prices higher and
higher, thus pushing yields (rates) lower and lower. What's going to happen
though? Like the housing market, many of us have learned over the past 7 years.
If the price is right...many of us would sell in a heartbeat. When prices get
high enough on these Mortgage Bonds, you will see many of the pension funds,
bond funds (who normally buy mortgage bonds), etc, unload their mortgage bonds
that they bought months ago for a nice profit. These funds know that the Fed is
the buyer. So what you will see is it will get harder and harder for rates to
move lower. If it is not worth it for these funds to buy mortgage bonds, then
the only buyer left is the Fed. Look at it from your point of view. Would you
buy a 30 year Bond for 3% return on your money?
What we have in our
favor though that might help keep rates low and keep these Funds buying
mortgage bonds along with the Fed is Europe, especially Spain. Spain's 10 year
T-Bill is hovering around 6.75%. Our 10 year is around 1.60%. Spain has around
25% unemployment in some areas, and is on the verge of falling off the fiscal
cliff. So as long as Europe is having these issues (and they will for years to
come) it will keep investors jittery about the all around health of the economy
thus keeping money in the bond market and rates should stay low.
We had some economic
data that came out yesterday. We had new home sales released for August.
Estimates were 380k and the actual number came in at 373K. This number is a
little lack luster.
We just had some new
economic data come out. First we had the Initial Jobless Claims. These are
people receiving first time unemployment benefits. Estimates were 380K and the
actual number is 359K. For us to really start having a better jobs situation we
really need to bring this number down to around 325K.
Next we had the
durable goods order. Durable good orders estimates were -5.1% and the actual
number was -13.2%. This terrible number was attributed to a lousy month in Auto
sales and Boeing Airplanes. Boeing had orders to build 100 planes last month,
but it was cancelled to just 1 plane order. Also Defense spending was down 40%
last month as well as the Afghanistan war is starting wind down. That had a
huge effect on this durable goods number.
Lastly, we had the
final reading for quarter 2 GDP (gross domestic product). The estimates were
1.7% and the actual reading came in at 1.3%. This means that our economy is not
growing. We need around 2.5% to 3.0% on average to stimulate growth.
So what to take away
is that all this economic news is lousy. Even with all this bad news, rates
will open up worse today due to profit taking of bond funds and people
capitalizing on the recent huge run up we have had in rates. As long as the
economic data stays like this, rates are not going to shoot up. We will see
volatility though and it will be harder and harder for the Fed's to keep rates
low.
As I finish up...this
just in, The US postal service is expected to default on a 5.6 billion payment
that is due this weekend for retirees, and employee costs. The average loss for
the post office is 25 million a day. What a great business model. So expect
stamps to be going up very soon.
Be aware of your
market, educate your clients and let's close some deals.
Josh
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