Only One Way for Rates to Go
Americans have assumed the roller coaster goes one way, legendary bond manager Bill Gross told The Times this weekend. It’s been a great thrill as rates descended, but now we face an extended climb. While rising interest rates will reverberate throughout the economy, they are likely to have a particularly noticeable impact on the housing…
Americans have assumed the roller coaster goes one way, legendary bond manager Bill Gross told The Times this weekend. It’s been a great thrill as rates descended, but now we face an extended climb. While rising interest rates will reverberate throughout the economy, they are likely to have a particularly noticeable impact on the housing market. With rates on 30-year fixed mortgages currently in the mid-5-percent range, every percentage point rise can increase the cost of carrying a home by 19 percent, according to a Columbia prof. Whether there ends up being a proportionate decline in home values remains to be seen, but it’ll certainly add another headwind for the housing market just as some regions have started to see some stabilizing. The only good news for those with existing fixed-rate mortgages is that, to the extent that higher rates correlate with a rise in inflation, real interest rates on your mortgage could fall.
Consumers Face the End of an Era of Cheap Credit [NY Times]
Graphic from The New York Times
Not Treasury (although they are indirectly a part of it), bkhabitat, banks. Research Lehman’s Repo 105 program. And FDIC often closes banks that recently reported profits by hiding losses (i.e. Indymac).
File this under “general ideas”.
***Bid half off peak comps***
I believe the amount of money issued, outstanding, borrowed and begged for by the US gov’t is quite a bit more transparent than the books of Enron.
making this comparison just shows ignorance.
Sorry BHO, while I may think that some of your general ideas have validity, your comments hurt your credibility. Are you really trying to compare the US government’s finances to Enron? Are you really convinced the Treasury is committing accounting fraud?
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“If the debt burden were going to cause a big problem it would already be reflected in the markets.”
Wasn’t reflected in real time for Enron stock. Accounting fraud creates wonderful fantasies until the alarm clock starts ringing.
WOW, lots of misinformation in that long winded What-like rant.
“now i have been wondering if we should accelerate those plans and try to sell/buy in the summer”
You got it wrong. Sell, rent and THEN buy. Buy after NY CS YOY turns green and stays there after the second dip.
“Unless inflation picks up, it’s plausible rates will yo-yo between 5 and 6%, which has been the case for the last few years.”
Inflation won’t pick up. We will continue to deflate. Rates will still rise because of risk.
“If rates increase because the economy is stronger (likely) then the stock market rally will get very heated before it sells off.”
Why would the market sell off if the economy is “stronger”?
“‘consumer credit’ being the major force anyway. The 3.9% credit cards are out the window and 11-18% will become the norm (again). This will force frugality and dependence on *cash* instead of just charging it.”
Yup, deflationary spiral as most money is credit.
“History also tells us that at the beginning of rate rises, there’s a rush to buy properties as people want to lock in a rate that they see moving away from them”
Impatient buyers. Foolish sheep. History also tells us that prices eventually correct inversely to bridge the monthly payment gap whether lower (think 2003 to 2007) or higher (think now and beyond). “Common sense” but sense aint common.
“The cessatiioon of the fed ending MBS purchases was one of the most telegraphed moves in monetary history. Private lenders have been chomping at the bit to step in and have.”
At higher rates. No Fed competition. That’s the point!
“note to self:
free financial advice from self-proclaimed experts is probably worth less than par value.”
Might be a suicide note depending on who you’re referring to.
“Yet I suspect you own nothing to take advantage of that prediction, BHO.
Like TBT, TYO and TMV”
Thanks for the tip, DIBS. Back to the point…
“Pimco Says Investors to Hold Down U.S. Mortgage Rates”
Then why this from the same article?…
“The Fed’s decision to end its purchases won’t be good for the market…If you take a big buyer out of the market, spreads may widen…People looking for home loans will have to pay higher rates…and that obviously won’t be good for the housing market.”
The market “needs” more than just a mere kneejerked “sparked flurry of [sheepish] buyers” in response to an increase as little as a 0.15 percentage point as mentioned in the article. When the eventual correction from higher rates makes headlines, the sheep will understand.
Fannie and Freddie will remain in trouble as foreclosures mount. It’s the mortgages that will be holding down investors.
At the end of the day, half off.
“If the debt burden were going to cause a big problem it would already be reflected in the markets.”
Wasn’t reflected in real time for Enron stock. Accounting fraud creates wonderful fantasies until the alarm clock starts ringing.
***Bid half off peak comps***
I do expect rates to rise and to own a few of those short treasury ETFs. I also own 30 Year treasuries @5.40% in my retirement account and am keeeping them. I don’t expect rates to rise so much that they choke of the economy. They will rise as the economy stregthens. Nor do I see them rising so that 30 Year mortgages get to 7-8%.
I am still long Japan, a lot. We do not have a Yen hedge on and so far that’s been OK. I have not cashed out of Jaoan.
We did however sell our exposure to Thailand (TTF)last Wednesday when martial law was declared Wed Am our time. It’s down 7% from where we sold it and we shorted some at the same time.
PIMCO does a lot of different and seemingly conflicting things in different funds.
I’ve been a strong advocate of investing outside the US. My specialty is Asian stock and I’ve been doing those since 1989.
If the debt burden were going to cause a big problem it would already be reflected in the markets. The markets don’t think it’s such an issue. The market could be wrong and Bill could be right.
I suspect DIBS can own TBT and make such a forecast because he is expecting moderate economic recovery (which will have a positive impact on housing prices) and a corresponding modest increase in interest rates.
It’s a reasonable position to take though it does require a lot of assumptions, namely that the Fed can correctly control the money supply (withdraw enough stimulus to keep inflation in check but not so much that they cause a double dip).
If you think Bernanke is a smart guy, probably a reasonable bet.
DIBS, noticed your article on PIMCO, but did you see the article today about how PIMCO is dumping treasuries because Gross fears sharply higher interest rates caused by inflation and massive borrowing. He seems to be anticipating some stagflation because he is moving money out of the US. for a homeowner, that is obviously the wrost case scenario – no economic growth and higher interest rates.
DIBS:
Dont you own TBT? How do you square that with your interest rate forecast?
FYI: Japan up again. You told me NOT to hedge and then you cashed out. I made money on the hedge and I am up on the position too.
Pimco Says Investors to Hold Down U.S. Mortgage Rates
April 12 (Bloomberg) — Investor demand for mortgage-backed securities will keep U.S. home-loan rates down after the Federal Reserve ended its purchases of the debt, said Pacific Investment Management Co., manager of the world’s biggest bond fund.
Here’s the whole story….
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6Vz3isZrQaQ