Mortgage rates worsened today as mortgage bonds give up all of yesterday’s price gains and more. Both mortgage bonds and Treasuries are taking a beating as the risk trade is back on this morning and the Dow is up over 50-points at the moment as money swings back into equities and away from debt instruments.
Who knows how long this will last and expect whiplashes back and forth as the market tries to make sense of the distortions created by government through easy money policy initiatives and the Quantitative Easing (government debt monetization) scheme.
As we discussed yesterday, bond traders will begin to demand a higher yield on bonds (higher interest rates) to offset the perceived risk of default as government heaps on massive amounts of debt that just may not be able to be repaid. Bond traders also have a deep fear of inflation which, if left unchecked, would literally destroy the value of their bond holding as government allows their currencies to be debased by massive increases in money and credit through the Quantitative Easing Schemes of the world’s central bankers.
The bond picture is getting clearer and clearer as the days go by. As governments manically issue huge amounts of debt just to keep their welfare programs afloat and the doors of government open and their enablers in the central banks create massive amounts money out of thin air to purchase those government debts, it is beginning to be obvious that the bond markets and paper currencies just may be the last great bubble to go POP.
Governments are realizing that their options to keep the game rolling are becoming very limited…. print and inflate or default … both bad. Reasons for the bond sell off and an equity rally this morning also range from Obama reaching a compromise on the tax cut extensions to concerns over the deficit and to higher than expected prepayment speeds on the underlying mortgages that make up the mortgage bonds themselves.
Economic news was of little import as its … sell, sell, sell in bond land this morning, pushing the 10-year yield up to 3.08% at the moment. Today brings the first of three Treasury auctions with $32 Billion in 3-year bonds on the block today—results due out around 10am and you all know who they buyer will be …. That’s right … the Federal Reserve. Mortgage bonds are yielding less than 30-year Treasury bonds
What does it mean?
The answer is not immediately apparent. On the surface, this chart indicates that the average American mortgage-holder is a better credit risk than the US government. After digging a little deeper, the picture doesn't change very much. The average American mortgage-holder is genuinely trying to repay his debts. The US government isn't.
The answer is not immediately apparent. On the surface, this chart indicates that the average American mortgage-holder is a better credit risk than the US government. After digging a little deeper, the picture doesn't change very much. The average American mortgage-holder is genuinely trying to repay his debts. The US government isn't.
Treasury bonds remain the global benchmark for safety and reliability. But at the same time, Federal Reserve Chairman, Ben Bernanke, is busy establishing a new global benchmark for dumb ideas. He is busy printing up dollars in the name of dollar stewardship.
The man considers it a good idea to sacrifice the dollar's hard-won reputation in the pursuit of a lower unemployment rate. He considers it prudent to exchange America's world-leading credit-worthiness for short-term economic benefits.
But the global economy does not operate according to the wacky theories of academia. It follows the common sense principles of the real world. Chairman Bernanke does not seem to grasp the fact that the Federal Reserve does not create jobs; the private sector does.
Nevertheless, the night before last on 60 Minutes, Bernanke defended his Quantitative Easing scheme as an essential assault against unemployment.
"At the rate we're going," said the Chairman, "it could be four, five years before we are back to a more normal unemployment rate." Therefore, Bernanke continued, additional Quantitative Easing is "certainly possible... It depends on the efficacy of the program."
In other words, the Chairman will continue to debase the dollar for as long as it takes to revive economic growth...or to destroy it. According to the academic theories that Bernanke embraces, the Federal Reserve can stimulate the economy by printing dollars and buying Treasury bonds, thereby lowering interest rates...and facilitating capitalistic ventures.
In the real world, however, currency debasement is just that, currency debasement...which is just a form of wealth destruction. And notwithstanding Ben Bernanke's theories, destroying wealth never creates it.
Bernanke believes he is waging a war against economic malaise and unemployment. Unfortunately, his arsenal features a falling dollar and a rising inflation rate.
These dynamics are not lost on bond investors ... or at least not completely lost. Yields on long-term Treasury securities have been climbing since August. Last week, the 10-year T-note yield pushed above 3.0% for the first time in months and its 3.08% this morning. 30-year bond yields have also been climbing.
So Bernanke's tactics are working, right? Hardly.
The economy added a paltry 39,000 jobs in November, as the unemployment rate jumped to 9.8%, the highest level since April.
So if you're keeping score at home, it's...
Bad Economy: One
Dumb Ideas: Zero
But the global economy does not operate according to the wacky theories of academia. It follows the common sense principles of the real world. Chairman Bernanke does not seem to grasp the fact that the Federal Reserve does not create jobs; the private sector does.
Nevertheless, the night before last on 60 Minutes, Bernanke defended his Quantitative Easing scheme as an essential assault against unemployment.
"At the rate we're going," said the Chairman, "it could be four, five years before we are back to a more normal unemployment rate." Therefore, Bernanke continued, additional Quantitative Easing is "certainly possible... It depends on the efficacy of the program."
In other words, the Chairman will continue to debase the dollar for as long as it takes to revive economic growth...or to destroy it. According to the academic theories that Bernanke embraces, the Federal Reserve can stimulate the economy by printing dollars and buying Treasury bonds, thereby lowering interest rates...and facilitating capitalistic ventures.
In the real world, however, currency debasement is just that, currency debasement...which is just a form of wealth destruction. And notwithstanding Ben Bernanke's theories, destroying wealth never creates it.
Bernanke believes he is waging a war against economic malaise and unemployment. Unfortunately, his arsenal features a falling dollar and a rising inflation rate.
These dynamics are not lost on bond investors ... or at least not completely lost. Yields on long-term Treasury securities have been climbing since August. Last week, the 10-year T-note yield pushed above 3.0% for the first time in months and its 3.08% this morning. 30-year bond yields have also been climbing.
So Bernanke's tactics are working, right? Hardly.
The economy added a paltry 39,000 jobs in November, as the unemployment rate jumped to 9.8%, the highest level since April.
So if you're keeping score at home, it's...
Bad Economy: One
Dumb Ideas: Zero
In the news today…
- IBD/TIPP Consumer confidence down in December
- Job Openings in U.S. Increased to Two-Year High
- Obama Agrees to Tax-Cut Extension, Lower Payroll Tax
- EU Rules Out Aid Boost, Banks on ECB to Fight Crisis
- Mortgage Prepayments Rise Faster Than Some Analysts Forecast
Reading Suggestion for Today…Forgive us Our Debts: The Intergenerational Dangers of Fiscal Irresponsibility, by Andrew L. Yarrow.
Take away… It may sound like a broken record, but rates are just not going to go lower and the trend as outlined and defended above is for them to go higher and to do so in the medium term. Dig in deep and understand the dynamics in the economy in general and the bond market in specific so that you can clearly and accurately articulate to your borrowers the delicate and transitory nature of today’s historically low mortgage rates. Your goal is to properly motivating your borrowers with hard facts so that they will see you as an expert and so that they will lock in those super low rates WITH YOU as their expert loan originator before those rates are gone for what may be a very long time.
No comments:
Post a Comment