ARM or Fixed-Rate? Tougher Call Now

the 30 yr fixed is based on the ten year treasury, and while rates might be headed up longer term, and no matter what anyone says, no one really knows. a look at this chart implies the rate on the tnx could easily pull back to 5.00 on this move:

http://stockcharts.com/h-sc/ui?s=$tnx&p=D&yr=1&mn=0&dy=0&id=p13771107604

Posted by: raphael at June 19, 2007 11:36 AM

the chart shows a powerful move breaking out of a base with resistance at around 5 or so. it doesn't matter what caused the move - whether it's cpi #s, last month's strong housing #s, maybe china rotating into other issues than the 10 yr treasury, hedge funds unwinding positions, a chain reaction in subprime loan pools raising cash....

the chart shows a series of gaps in a somewhat parabolic move - any good action often begets some sort of reaction, maybe 35%, maybe 50%, maybe a move to test one or more of those gaps. prices move as a result of supply and demand, and sooner or later the last buyer (or seller in this case, of bonds) is in (or out) for the time being.

there are no rules here, but most things that can be charted tend to follow patterns, and the best thing is to try to look at the chart and see what they are doing now, now that the media is saying about what already happened.

so, my reading of this is that the rate shown on the chart, that of the ten yr treasury, has temporarily peaked. I would make no prediction whatsoever as to what happens next, but from watching it trade it would appear that the bond is getting bought over the past few days, and not sold.

that said, the banks may be slow to react. most of them lowered by 1/8 of a point today, but the buy down schedules are not particularly borrower friendly. this is what people mean by tighter lending.

it isn't going to make it cheaper to buy, at any rate.

Posted by: raphael at June 19, 2007 12:29 PM

here's the chart marked up a bit:

http://stockcharts.com/h-sc/ui?s=$TNX&p=D&yr=1&mn=0&dy=0&id=p13771107604&a=109721760

Posted by: raphael at June 19, 2007 12:40 PM

as I posted that $tnx is testing 50.98, the low of the day. meanwhile, gold is is up. homebuilding stocks are mostly up. I wouldn't be surprised to see the 30 yr fixed pull back another point here to 6.375 or maybe even 6.25 before another attempt to move up. keep in mind that the fed meets next week, and traders will try to run stops on those who are short the long bond to get them to cover.

Posted by: raphael at June 19, 2007 12:51 PM

Nobody can rightly tell where rates will be a year from now, there are too many factors. People are watching the fed, but the fed has other things on its plate than the US housing market.

Last year at this time, all the experts were talking about higher rates, coinciding with a peak in the ten yr rate, yet it looked as though rates would go lower, which they did.

In any case, a chart can show you where you've been, and the emotions of buyers and sellers. Anything in the future is pure speculation, and everyone has their favorite way to do that, and to each his/her own (a side note to the ta = whatever...).

As to whether I personally would go for an adjustable or a fixed 30: I would always go for the fixed 30, because the security of a fixed number on the largest expense of owning outweighs the initial savings of the adjustable. The spread would have to be much greater than it usually is to convince me, or else I would have to know for an absolute fact that I was selling before the rate expired. Another thing to look at is the interest only 10 year and 15 year, which are really fixed 30's with interest only in the early part, then a short amortization in the latter part. I priced these recently though, and the rates just weren't low enough not to go with a 30 year fixed and buy it down with a point or more.

To itsawrap: as for a "straight shot to 5.5" all I say is keep an open mind. finding support at former resistance isn't going to propel it anywhere. the markets will in their own time.

Posted by: raphael at June 19, 2007 1:28 PM

The rate on the 30 year fixed, the rate on the ten year treasury, and mortgage backed securities are all related and while they don't move in lockstep, they do move together. The rate on the 10 year is a direct relation to demand for the security, which feeds long rates, and can be affected by demand for or pressure on mortgage backed securities. The dollar figures into this as well, as well as foreign demand for 10 year treasuries, which has kept rates low during the period the fed has been raising the overnight rate.

Posted by: raphael at June 20, 2007 7:43 PM