Putting The Cart Before The Horse
Readers suggested a topic on the mortgage market. “At what point, if ever, will U.S. home sales slow down due to rising mortgage rates? When Treasury yields spike, 30-year mortgage rates tend to move up in lockstep with a slight lag. It seems like May 2013 has represented a serious paradigm shift in the Fed’s conviction that quantitative easing is the best way to heal the economy from the Fall 2008 financial collapse. One thing I have learned from the recent economic experience is that unbiased commentary on economic reality during a time of crisis is taboo. The high priests of lies and deceptions don’t much care to be called out on their games of charades.”
One said, “The charts look like 1976 again for gold and stocks. But this ‘1976′ could be two or three years long before it turns into late 1976 through 1980.”
One asked, “When the cash runs out and the primary buyers are J6P. Cash doesn’t care about rates, J6P does. The number of mortgage apps is due more to refinances than to purchases. There’s a huge rush of rfi’s, but at some point won’t we run out of those too?”
And finally, “The last crash happened why? Because resets were hitting and people couldn’t sell or refi their way out of the problem. Prices stalled and demand cratered. Is there anything like this on the horizon to stop the flips mania going on now? No resets like last time.”
The Memphis Business Journal. “Through late 2012, the planets seemed to be aligning for Realtors both in Memphis and across the U.S. With no imminent end to the Federal Reserve’s bond-buying strategy, mortgage rates promised to continue to lure in homebuyers off the sidelines. But the latest weekly report from Freddie Mac showed the average rate on a 30-year fixed rate mortgage crept up once again. But is the upswing in the market enough to either dissuade would-be homebuyers or persuade others to jump in the mix?”
“‘I’d mentioned in our sales meeting a couple weeks ago that rates were projected to increase through the rest of the year and my agents’ reaction was that they’re so low, does it really matter?’ said Jules Wade, principal broker at Prudential Collins-Maury Inc. ‘From their perspective, it’s not really turning any heads.’”
From Inman News. “Will housing heat up as buyers race to beat rising rates? The media loves this concept. A reminder how foolish so much media ‘analysis.’ In a long working life I’ve never once met a ‘not-buying’ client converted into ‘buying-now’ because rates are rising.”
“More important — hunch here, more important than all else put together — fear has faded, replaced by tentative optimism. Home prices are rising in the most desirable markets, but even in the price-flat ones, liquidity has returned. One of the most frightening aspects of the last half-dozen years: ‘Honey, our Realtor says the place is worth about $300,000, but might not sell.’ Just being able to sell is a great relief.”
From Barrons. “The rise in sales of new and existing homes has buoyed purchases of home furnishings and appliances. It’s also the reason why residential investment, a component of gross domestic product, has grown over each of the past eight calendar quarters — in five of them, including the most recent, at double-digit rates. Why barely one cheer, then? Because this housing recovery has been so stuffed with government steroids, you wonder if it could make it on its own if these drugs were withdrawn.”
“And where the FHA and VA are concerned, the down payments required are minuscule by conventional standards, ranging from 0% to 5%. According to a recent FHA report, the average down payment required on its insured mortgages in the first quarter has been a little over 4%. The VA’s rather chilling statistical category called No Down Payment indicates that close to 90% of its home loans normally enjoy this status.”
“Recent data are not available for the share of all mortgages insured by the FHA and VA. But we do know they accounted for a hefty 46.4% of all mortgages in 2011, way up from an average of about 10% from 2004 to 2007, just before the Great Recession. And even if the FHA/VA share has shrunk to about one-third of mortgages over the recent year, that one-third would help explain the rise in house prices, given the minuscule down payments. Imagine if a third of all recent purchases of stock were done on margin requirements of 0% to 5%.”
“If mortgage rates were to rise to 6% from a recent low of 3.5% (they were above 6.5% as recently as mid-2006), monthly payments on a 30-year mortgage would rise by a third, meaning the same-priced home would cost one-third more. (While the increase in the rate would exceed 71%, the payment would go up by only a third because of long-term amortization.)”
“Such a jump in financing costs would certainly slow the rise in home prices and purchases. Alternatively, to keep the housing boom going, the government could push for looser lending standards. It would be déjà vu all over again.”
From Town Hall. “This week economists, investors and politicians were treated to some of the ‘best’ home price data since the frothy days of 2006 when home loans were given out like cotton candy and condo flipping was a national pastime. The strong housing data is taken as proof that the economy has turned around and that a recovery is under way. Cooler heads may simply see how government policies have channeled money into real estate in order to reflate a bubble that has been collapsing for the last five years.”
“The truth is that most buyers cannot afford today’s prices without the combination of government guarantees and artificially low mortgage rates. The Federal Reserve has been conducting an unprecedented experiment in economic manipulation. At the same time, Federal control of the mortgage industry has become nearly complete. In addition, a variety of Federal programs are in place to help keep underwater homeowners in homes that they could not otherwise afford. Taken together, these programs create far more favorable terms for home buyers than those that existed before the crash.”
“This trend has allowed a recovery in home sales even while the national home ownership rate has dropped to 65%, the lowest rate since 1995. For the first quarter of 2013, the Federal Reserve reports a 10% delinquency rate for residential mortgages (those with payments that are at least 90 days past due). This is more than 6 times the rate in the first quarter of 2006. In contrast, credit card delinquencies currently stand at 2.65%.”
“In the meantime, by blowing more air into a deflating housing bubble, the Fed is misdirecting money into a sector that investment capital should be avoiding. A successful economy can’t be built on housing. Rather, a robust real estate market must result from a healthy economy. You can’t put the cart before the horse. As a nation, we do not need more houses. We built enough over the last decade to keep us well sheltered for years. Private equity funds should be using their investment capital to fund the next technology innovator, not wasting it on townhouses in Orlando and Phoenix.”
“Of course the real risks in housing center on the next leg down, in what I believe will be a continuation of the real estate crash. We can’t afford to artificially support the market indefinitely. When significantly higher interest rates eventually arrive, the fragile market will again be impacted. We saw that movie about five years ago. Do we really want to see it again.”
Recently I posted a report stating that a significant number of borrowers in Canada would be stressed by an increase in mortgage rates. Here’s one form the UK:
‘The Confederation of British Industry has predicted that higher-than-expected inflation will force the Bank of England to raise rates as early as the Spring and that rates could rise by 2.25 percentage points – to almost six times the current rate – by 2012. With mortgage rates set to follow, this could have dire consequences for the 7m home owners who currently have variable-rate home loans.’
‘According to the Council of Mortgage Lenders (CML), about 2.9m home owners would have mortgages that are no longer deemed “affordable” according to guidelines set down by the City watchdog, the Financial Services Authority.’
‘An interest rate rise of 2 percentage points would push up the cost of a £150,000 interest-only mortgage by £250 a month.’
Dire consequences were baked in when £150,000 interest-only variable rate mortgages were made.
‘Russian Prime Minister Dmitry Medvedev has sought to allay fears of an imminent economic crisis in the country, telling citizens they do not need to stockpile canned meat and matches, his press service said on Monday. “I am confident we will succeed in avoiding a crisis like that of 2008-9. There is no need to stockpile canned meat, soap, matches and salt!” Medvedev said in an interview with Komsomolskaya Pravda.’
‘Last month, Russia’s Economics Ministry slashed its 2013 GDP growth forecast from 3.6 percent to 2.4 percent in the wake of continuing negative trends.’
‘During a meeting with Medvedev last month, President Vladimir Putin warned that Russia could feel the impact of a new wave of the global economic crisis, and tasked government officials with developing new mechanisms to counter the risk of recession. ‘This is how it was in 2008, and now we are witnessing the same thing,’ Putin said.’
http://themoscownews.com/politics/20130520/191526223/No-need-to-hoard-canned-meat-matches–Medvedev.html
I was passing through podunkville eastern Oregon/western Idaho and there was a huge sign in front of a new housing project which read “$0 down USDA loans!” I wanted to snap a picture but it was too dangerous while driving. Yeah, the funny money is still here, and until it is gone this echo bubble has legs.
These zero down low rate loans or subprimes or whatever will take several years to play out, which should mean there’s money to be made in flipping, etc for those few years.
I don’t have the guts to do it and will keep my money parked, but it is obvious that right now EVERYTHING is being done to push housing. No crash on the horizon.
“These zero down low rate loans or subprimes or whatever will take several years to play out, which should mean there’s money to be made in flipping, etc for those few years.”
Doesn’t flipping generally depend on having greater fools available to pay a higher price? Given that China and Canada appear on the brink of housing crashes, and interest rates appear to be headed up, I’m trying to imagine where these buyers willing to pay more will come from.
Any thoughts on that?
They will come from the same place as last bubble, from the banks with crazy no standard loans this time explicitly approved by government policy.
From strawberry pickers, etc and all those who can get the loans now but couldn’t a few years ago.
Treasury Extends Foreclosure Program Despite Lack of Success
Thursday, 30 May 2013 02:42 PM
The Obama administration on Thursday said it was extending the life of its signature foreclosure-prevention program by two years to help more struggling borrowers keep their homes.
The Home Affordable Modification Program, or HAMP, was to expire at the end of this year.
When it was unveiled in 2009, the administration estimated it would help 3 million to 4 million homeowners avoid foreclosure by reworking loan terms. So far, however, only about 1.1 million homeowners have benefited from a permanent mortgage modification under the program.
“The housing market is gaining steam, but many homeowners are still struggling,” said Treasury Secretary Jack Lew. “Extending the program for two years will benefit many additional families while maintaining clear standards and accountability for an important part of the mortgage industry.”
The program, which draws from the Treasury Department’s financial bailout fund, pays lenders and servicers to rewrite loan terms for borrowers who can’t make their current mortgage payments.
The administration has refined the program since its inception to broaden its reach, including expanding eligibility and increasing payments to mortgage companies that lower borrowers’ monthly payments.
Still, of the $29.9 billion in bailout funds allocated for HAMP and other housing programs, the Treasury had spent only about $5.2 billion through March.
Officials declined to estimate how many more borrowers would benefit from HAMP’s extension. In addition to borrowers who have received loan modifications, the Treasury said the program had provided an example for the mortgage industry on how to best adjust mortgages for those needing aid.
But the program has been faulted by both Democrats and Republicans and by federal watchdogs for the high number of recipients who default on mortgages after getting the government aid.
“This decision solidifies the Obama administration’s place atop the list of the nation’s biggest subprime lenders,” said Rep. Jeb Hensarling, the Republican chairman of the House Financial Services Committee.
…
You don’t have to flip. You can make money through stocks or ETFs or if you have the stomach for it, options on stocks and ETFs of home builders / REITS.
This is the thing I don’t get. You say no crash on the horizon. Yet you will keep your money parked. Why?
Because I’m not some Nostradamus and am just speculating on a blog about my thoughts. I certainly could be wrong. while i didnt buy and get scorched last time, i also didnt anticipate the current level of intervention and rascalism. I’m far too risk averse with money I slave for and at this point don’t trust real estate or stocks.
I’d prefer not to worry even that little bit about the moment things change and getting burned like so many I know we’re in both stocks and real estate.
The risks you need to worry about are (1) inflation; (2) suboptimal return on cash (however you save it) relative to financial investments (stocks, bonds, whatever).
Also (3) requirements to help fund stealthy personal bailouts of greater fools who lost a bundle of money by purchasing homes during an epic real estate crash.
“I’d prefer not to worry even that little bit about the moment things change and getting burned like so many I know we’re in both stocks and real estate.”
Only people that got burned were those who sold. Someone who rode out the crash of 08/09 and kept buying (like yours truly, patting myself on the back) did quite well for himself. And that’s always the case with stocks. People who panic lose money. People who ride out the storms, make money.
I blame the MSM for that. They were practically telling people to SELL SELL SELL SELL!!! And they did. And then when the market went from 6500 to 15,000 in 4 years, they lost out.
And that’s always the case with stocks.
They always go up. And if they don’t we’ll make them go up at taxpayer expense.
“They always go up. ”
Long term, correct.
“Only people that got burned were those who sold. Someone who rode out the crash of 08/09 and kept buying (like yours truly, patting myself on the back) did quite well for himself. And that’s always the case with stocks. People who panic lose money. People who ride out the storms, make money.”
Try not to get too carried away with your self-congratulation act before acknowledging the help of your friends in the federal government.
You owe an extreme debt of gratitude to one federal agency in particular: The Federal Reserve. If they had not been around to save the bovine herd’s hides with QE1, QE2 and QE3, you would all be rendered into hamburger meat by now.
And rest assured: If there is another hard landing for the stock market, they will do exactly the same thing again. That’s why you need not worry that last month’s rout in the Treasury and MBS markets will spill over into the stock market any time soon.
But be sure to give your government bailout agency benefactors all due credit for your stock market wealth gains.
‘According to an associate who retreated from the mutual fund sales industry - NO ONE MAKES REAL MONEY OFF OF THE STOCK MARKETS. Sorry, excuse the caps. And very, very few investors who reside in the middle classes will retire due to the money generated from their investment portfolio or their investment philosophy…And to clarify, no one makes real money off of the equity or bond markets, except those who produce or sell a financial product or provide financial advice.’
‘So why no returns for the little guy, and girl? The stock market is mostly long periods of losing money against inflation, punctuated by two rabid bull markets that saw equities reach giddy levels of extreme overvaluation. OK, cover the eyes of any squeamish investors who might be nearby and check out this chart.’
http://seekingalpha.com/article/949001-almost-no-one-makes-money-from-the-stock-market-alone
The only people I’ve known personally that got rich from the stock markets were stock brokers.
What about return OF capital? I still worry more about this than return on capital at this point.
The trick (which is very hard to actually do) is to fight your emotions when investing.
Sell when there are no apparent storm clouds and buy when everyone is telling you the world is going to end.
I find it very interesting that recent moves in the stock market have occurred with still a lot of people proclaiming that the world is just on the verge of ending. My head is telling me that the stock market is very fully valued, but my gut is telling me that there is a possibility that the market goes quite a bit higher if those negative voices fade without the world ending.
‘proclaiming that the world is just on the verge of ending’
Yes, anyone who doesn’t think stocks can go up. up UP, is a doom and gloomer. Smithers says never sell. So how do you make money on stocks?
Think the yield on CD’s is low? Look at what stocks pay you every year if you don’t sell. Sitting around counting profits you don’t have isn’t very smart, IMO.
No one makes money off of stock markets? My realized gain in 2012 was over $30,000. I have $140,000 in unrealized Gain in my company stock and hoping to ride until October to get another $23,000 in realized gain from a batch I cannot sell yet.
My 401k is up over 90% excluding the added contributions I made since January 2009.
Stocks are the best asset class to get wealthy from…NOT REAL ESTATE. And no, precious metals do not do as well as stocks either. I was fully into stocks at the peak in 2000. My IRAs and 401ks have been fully into stocks at every market high since 1989. Including 2007/2008. I keep buying mutual funds.
Stock ownership is the number one means to provide capital to growing businesses. Look at Tesla. spaceX also owned by Elon Musk, might go IPO any time. I am going to get in on it. Last time I checked, human ingenuity does not quit in recessions, depressions, and is not owned by the Fed. There will be awesome technical breakthroughs in the future and you can bet on that. There will be equivalents of the information technology revolution in our future, even technical breakthroughs that might free man from thugernment.
My 401k is up over 90% excluding the added contributions I made since January 2009.
Bill, how much is it up since January 2007?
You are cherry-picking the low, rather than including the declines in your performance figures.
‘unrealized Gain in my company stock and hoping to ride until October …from a batch I cannot sell yet’
See, the stock doesn’t make you any money. It’s the person who buys it from you. And why would they do that? Because someone else is going to pay even more to them. This sounds familiar.
unrealized Gain
“Unrealized Gain” is a misnomer.
What you really have is a daily appraisal of the value of your shares, based on the actual transactions of other people occurring in the market. While the market for securities is far more liquid, it is not that dissimilar to an appraisal on a RE property, also based on other peoples’ transactions.
At the end of the day, you only “made money” when you realized the gains.
Some stocks pay dividends.
I don’t know before 2009 because my fiduciary was switched out of Merrill Lynch to my current one December 31 2008. But I dollar cost averaged in the Merrill lynch one from late 2000 to the end of 2008, over eight years.
‘Some stocks pay dividends.’
I admire the C corporations that still do this. But if you receive those dividends from a US corp., it’s taxed twice. Don’t get me wrong; I’m a capitalist. I happen to believe the government and wall street turned a system of raising money for businesses into a casino that encourages off-shoring. One by taxing dividends and the other by deferring taxes on stock purchases. They encourage you to put money in, and discourage money flowing out. Along the way, this tax deferment pulls in joesixpack, and viola! The government has to help the stock market (wall street) because it’s for the little guy! And these corporations get bigger and bigger. They aren’t very nimble or good at anything, so they buy up smaller corps and downsize or off-shore them for easy profits. Now we can’t expect the best and brightest CEO’s to run a $100 billion company without paying him a gazillion bucks a year, can we? And the board of directors! Gosh, paying them a million $ an hour is chicken feed compared to the cash these guys are sitting on.
Rather than complaining about off shoring, the quiet ones follow the investments offshore. PRASX, VEMAX, REREX, DODFX, OPPAX…
We should focus on “on shoring” educated foreigners, such as from India and Asia, also Europeans. Instead our elitists are on shoring new members of the demobcrapic party to vote for consuming what is left of the spoils from the taxpayers.
Yes, only importing cheap H1-b workers from India and China can save the United States.
Prime, apparently you ignored the part of my post where I wrote that I realized over $30,000 in gains I 2012. Conveniently, ignored.
Also ownership of equities has real value, particularly when your NAV or cost basis is very low. By the way, my company’s book value per share three years ago was about half of what it is today. My company made some good acquisitions that generated increases in EPS. Its quarterly reports? Real!
Yes I do sell stocks sometimes I sell other asset classes sometimes. There are good situations where you do take money off the table. And I DID!!!!
There are times when you back off from the game and enjoy your winnings on wine, women, and song. Done that and will do so in the future.
I use an excel spreadsheet to track my assets. On an average year I gain over $125,000 on my assets. So there are occasions to get a wild hair and live it up.
One doesn’t actually make money until one sells the financial product (in this case, stocks).
And one better hope one doesn’t do that when the rest of the herd is trying to sell.
‘No crash on the horizon’
‘For the first quarter of 2013, the Federal Reserve reports a 10% delinquency rate for residential mortgages (those with payments that are at least 90 days past due). This is more than 6 times the rate in the first quarter of 2006′
Also from the Town Hall piece:
‘This trend has allowed a recovery in home sales even while the national home ownership rate has dropped to 65%, the lowest rate since 1995 (down from almost 70% during the last decade).’
It could be said the crash never ended.
I’ve noticed that 95%+ of observers completely miss crashes that play out in slow motion.
The housing crash is a great example. And all the various temporary government policy responses to slow the crash have made it even harder to detect.
When I say crash, I mean in prices. I agree that the crash in the sense of foreclosures, delinquencies, etc never ended and those chickens haven’t yet properly come home to roost.
I have friends in one flavor or another of this mess and am still astounded to what’s going on with them and their underwater delinquent properties at the same time everyone is crowing about recovery and approaching previous highs.
Line right up donkeys…… get fawkin’ barbecued. jackasses.
I don’t trust the comment about delinquencies.
Here is the actual NY Fed report:
http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q12013.pdf
From the first page of the report:
“Mortgage delinquency rates continued to improve in 2013Q1, with 5.4% of mortgage balances 90+ days delinquent,
compared to 5.6% in the previous quarter.”
5.4% is not 10%.
Page 8 shows that in 2006, a cyclical low, this appears to be approximately 2% to 2.5%.
2.5x to 3x is not 6x.
Exaggerating today’s numbers and then comparing them to a cyclical low seems disingenuous at best. If things are so bad, you shouldn’t need to stoop to such levels. Just state the facts. Peter Schiff is losing credibility with me.
‘Schiff is losing credibility with me’
This is funny, even as he increasing looks dead on about housing, he loses credibility with you!
If you have a problem with a number, why don’t you write and take it up with him? Unlike the MSM, I’d bet he would reply.
It’s just another day of Rental Pimp’s barrage of lies and misrepresentations of housing.
Hey Rental Pimp;
You have an equity stake in the direction of prices.
What did you pay in price per square foot for the depreciating shack you bought in 2011?
You should instead of repeat what other critics of Schiff say, start listening to Schiff for once. He is not 100% into precious metals. In U.S. stocks he likes energy. Otherwise he advocates emerging markets, those epithet real economies. Look who is buying gold: Chinese, Indians. BRIC countries do not have Bernanke or the silly EURO clowns.
“epithet”/real
Don’t know how my iPad came up with epithet from “are real”
http://www.youtube.com/watch?v=HIyEKn6GEAs&feature=youtu.be
SchiffReport
Wow. Starting at 11 minutes into the video.
Yes you wrote it here, many others. When the Fed removes the punch bowl housing is going to KEEEEEEEERASSSHHHHH!
Mortgage rates jump to highest mark in a year
By J.D. Harrison, Published: May 30, 2013 at 10:15 am
Mortgage rates surged again this past week, completing a consistently steep ascent in May, according to data released Thursday by Freddie Mac.
The 30-year fixed-rate average jumped to 3.81 percent with an average 0.8 point, its highest mark in the past year. May began with the 30-year hovering at 3.35 percent, well below last year’s reading at the start of the month; however, four straight weeks of increases have pushed the average above last year’s reading of 3.75 percent.
The 15-year fixed rate average followed suit, rising to 2.98 percent from 2.77 percent last week, with an average 0.7 point. One year ago, the average was 2.97 percent.
Hybrid adjustable rate mortgages, on the other hand, remained below their averages from last May. The five-year ARM rose slightly to 2.66 percent, down year-over-year from 2.84 percent, and the one-year dropped slightly to 2.54 percent, down from 2.75 percent a year ago.
A Freddie Mac executive pegged the rising fixed-rate averages to some recent signs of economic improvement, including higher home prices and improving consumer confidence.
“Fixed mortgage rates followed long-term government bond yields higher following a growing market sentiment that the Federal Reserve may lessen its accommodative policy stance,” Frank E. Nothaft, Freddie Mac vice president and chief economist, said in a statement, adding that the “improving economic data may have encouraged those views.”
…
In the late 70’s people bought houss with assumable mortgages negating the effects of higher mortgage rates.
“When significantly higher interest rates eventually arrive, the fragile market will again be impacted. We saw that movie about five years ago. Do we really want to see it again.”
5 years ago we saw big price declines, not sure it had anything to do with higher interest rates then.
Housing interest rates will be kept low through any and all means necessary.
Even if they go up, it won’t be that fast.
I think all this talk of higher rates is just to scare people the realtors see as fence sitters to make their decision for Christ.
‘not sure it had anything to do with higher interest rates then’
Greenspan co-authored a report on mortgage equity withdrawal, in 2005 I think, which caused him to see the light. The Fed started raising rates then. I’ve always considered that to be the turning point. There was also the article which pointed out, “Greenspan used to deny there was a housing bubble, now he won’t shut up about it.” So there was some “talking the market down” going on too.
‘Even if they go up, it won’t be that fast’
This past month seemed kinda fast.
“This past month seemed kinda fast.”
Yep. It will show up as a bond market (including MBS) crash when viewed through the lens of the rear-view mirror.
I hope you are both right and loan rates start ticking up, and this puts a damper on the budding mania. But I think the powers that be will do everything to stop it, even to the point of some crazy negative interest rate subsidy or something.
This past month seemed kinda fast.
Yes, it was kinda fast—however, it was also only a 1/2-pt move.
I think the real grind higher will be very slow, and marked by many reversals…
‘it was also only a 1/2-pt move’
IMO what’s significant is a reversal of a 5 year policy of near zero rates, or market resistance against that policy. The Japanese QE splash was met with higher rates, suggesting that the bond market is rebelling.
suggesting that the bond market is rebelling.
It’s not clear to me yet whether it is a true reversal, or a temporarily blip.
I do, however, truly hope that it is the bond market rebelling.
Obviously this was penned before the final hour of trading yesterday. But a continuation of yesterday’s late-day action would be indicative of condition one in Krugman’s table (”Eek! Debt!”).
That said, I am sure there are many different possible interventions from behind the curtain to offset this perception.
May 29, 2013, 12:58 pm
Rate Stories
I’ve been getting some questions about the recent rise in long-term interest rates. Those rates are still at levels that would have seemed absurdly low not long ago — but they are up significantly from a few months ago. What should we make of this move?
Well, rather than offering a commentary on the market, I thought I might be most helpful by talking about how to figure things like this out on a more general basis. And the way you do this is by trying to tell several alternative stories that might explain what’s happening in one market, and then ask what those stories imply for other markets.
So when long-term interest rates rise, there are three main stories you hear. One is that the bond vigilantes have arrived, and are selling US debt because they now believe in the horror stories. Another is that the Fed has changed, that it may be ready to snatch away the punch bowl sooner than previously believed. And the third is that the economy is looking stronger than expected, which means that the Fed, although just as soft-hearted as before, will nonetheless start raising rates sooner than previously believed.
All three of these stories would imply falling bond prices, that is, rising interest rates. But they have different implications for other markets, in particular for stocks and the dollar. Debt fears — basically, a run on America — should send stocks and the dollar down along with bonds. A perceived tougher Fed should send stocks down but the dollar up. And a better recovery should send both stocks up (because of higher expected profits) and drive the dollar higher.
OK, there are possible complications; you can manage, just, to tell stories that don’t quite work as I’ve described. But these are surely what you should have in mind in your first pass at the issue. Here it is in a table:
Condition Bonds Stocks Dollar
“Eek! Debt” Down Down Down
“Tougher Fed” Down Down Up
“Stronger Recovery” Down Up Up
And while day by day there are variations, basically what you see over the last month or so is line 3: falling bond prices accompanied by rising stocks and a rising dollar. So this looks like a story about macroeconomic optimism.
Stocks Having a ‘Taper Tantrum,’ Says Fidelity Pro
Published: Thursday, 30 May 2013 | 10:27 AM ET
By: Matthew J. Belvedere | Producer, CNBC’s “Squawk Box”
‘Bond Vigilantes’ Finally Coming Out of Woodwork: Expert
Thursday, 30 May 2013 | 7:16 AM ET
Jurrien Timmer, Fidelity Investments portfolio manager, provides a global macro perspective on where investors should put money to work now, as concerns over possible Fed tapering continue to weigh on markets.
The Federal Reserve realizes, at some point, it has to scale back its $85 billion-a-month bond purchases, and the acknowledgement of this eventuality has made the stock market “very unpredictable,” Jurrien Timmer, portfolio manager and director of global macro at Fidelity Investments, told CNBC on Thursday.
Since Fed Chairman Ben Bernanke’s testimony and the Fed minutes last week, investors have been waking up to the prospect of the central bank slowing its quantitative easing sooner than expected—a phenomenon that Timmer called the “Taper Tantrum.”
The term “taper” has recently become common parlance in the investment community, after hedge fund titan David Tepper appeared on “Squawk Box” on May 14. The founder and president of Appaloosa Management said the Fed has to taper to keep the stock market advance on an even keel.
“The Fed knows it eventually is going to have to taper,” Timmer said on “Squawk Box” Thursday.
He also referred to that recent Tepper appearance and the hedge fund manager’s 2010 “Squawk” interview that sparked the so-called Tepper Rally.
“It was the ‘Tepper Rally’—now it’s the ‘Taper Tantrum,’” Timmer quipped.
“The bond vigilantes have finally come out of the woodwork,” he said, warning that if the yield on the 10-year Treasury continues to go higher to the 2.5 percent level, “it’s going to start to undermine the equity market” at some point.
But stocks have avoided the spring swoon of the previous three years because, Timmer added, “the Fed is not only printing, but printing by the bucket-load. And the Bank of Japan is undergoing this incredible monetary experiment of doubling the monetary base.”
…
ft dot com
May 31, 2013 6:19 pm
Markets whipsaw on Fed uncertainty
By Michael Mackenzie in New York and Ralph Atkins in London
The worst month for US Treasuries in two years ended on Friday with whipsaw trading in the bond and stock markets, reflecting investor uncertainty about when the Federal Reserve will curtail its stimulus policies.
The New York morning was marked by a continuation of the Treasury market selling that has pushed yields higher – and prices lower – in May. The yield on the benchmark 10-year note rose as much as 15 basis points to 2.21 per cent as investors saw a robust report on midwest manufacturing as a sign the Fed could cut back on its bond-buying programme as soon as this summer.
But investors shifted gears in the afternoon, buying Treasuries and dumping stocks. After rising in early trading, the benchmark S&P 500 index closed 1.4 per cent lower – its biggest one-day loss since mid-April – while the yield on the 10-year Treasury finished at 2.13 per cent.
Analysts said the late turn in stocks unsettled investors who had been betting on falls in bond prices – and higher yields. Declining equity prices often increase the allure of bonds as a haven.
“No one likes to see equities close at their low on a Friday as it sets the market up for an ugly open the following week,” said Michael Kastner, managing principal at Halyard Asset Management, adding that short sellers in the Treasury market were closing positions later in the day.
…
Did you notice how before late in the day this past Friday, rising interest rates had nothing whatever to do with the stock market? Interest rates have been rising steadily since May 2, but stock traders failed to notice it until May 31?!
What changed overnight to bump market dynamics into Krugman’s “Eek! Debt!” scenario?
Stocks swoon on interest rate fears
Stocks fall sharply as a persistent rise in rates over the last month threatens to derail the powerful rally this year on Wall Street.
May 31, 2013|By Andrew Tangel, Los Angeles Times
NEW YORK — A sudden jump in interest rates is casting a shadow over the stock market.
Stocks fell sharply Friday as a persistent rise in rates over the last month threatened to derail the powerful rally this year in share prices.
…
Rising mortgage rates could fuel already hot housing markets
Rates have risen half a percentage point since setting record lows last fall. That could push potential home buyers to seal a deal before rates rise further.
In a weekly survey of what lenders are offering to solid borrowers, Freddie Mac reported Thursday that the average rate for a 30-year fixed loan rose from 3.59% last week to 3.81% early this week. Above, a home for sale in Mt. Lebanon, Pa. (Gene J. Puskar, AP / May 6, 2013)
By E. Scott Reckard and Alejandro Lazo, Los Angeles Times
May 31, 2013
Mortgage rates have risen half a percentage point since setting record lows last fall, and many economists expect them to continue rising for the foreseeable future.
The increase, a reaction to the improving economy and housing markets, could fuel already hot housing markets as potential home buyers look to seal a deal before rates rise any further.
“I think rates will drift slowly higher,” said economist Christopher Thornberg, head of the West L.A. consulting firm Beacon Economics. The increases might add as much as 1 percentage point to mortgage rates by the end of next year, he said. “But within these ranges, home prices are still cheap compared to incomes and apartments.”
…
Certainly he means homes in the inland empire. Still along the beach cities in L.A. it is cheaper to rent than to own.
I had a girlfriend in Culver City who rented an apartment there. She had $500,000 in CDs. She was in a good situation. But very private and i did not lnow what her work was. She encouraged me to use up some miles to buy her a round trip ticket to Myrtle Beach, S.C. in 2006 to go look for bargain priced houses. She certainly saw low prices, but she and her friend who went chickened out. They were frightened by the people there.
I encouraged her to hold onto her CDs. Oh, for her birthday I bought her gold coins. Spot price in the $600s. She probably remembers me.
To what degree are this month’s soaring interest rates due to fundamentals versus political turmoil inside the FOMC?
“Soaring” is a bit of a stretch. They are still incredibly low.
You are missing it. The issue isn’t whether rates are incredibly low; rather it is how much potential owner-occupant offer prices (aka “home purchase budget constraints”) decline when rates spike by a “small amount.”
I’ve recently posted some illustrations of this, which you may have missed. I could try again if you are interested.
Annual Income $100,000
Multiplier 30%
Monthly Payment $2,500
Term 30 years
Interest Rate / Principle balance that can be financed
3.59% $550,559.39
3.9% $530,033.61
4.4% $499,240.25
TAKE HOME CONCLUSIONS:
* A “small” increase in mortgage rates to a level which is “still low” is sufficient to reduce the principle balance that can be applied to a mortgage-financed home purchase by 10%.
* Unless the Fed decides to force mortgage rates down further to still-lower historic lows, or incomes quickly rise to offset rising mortgage rates, we have already seen the highest potential mortgage-financed offer prices of this cycle.
Thank you.
If you have an income of $100k, you shouldn’t be looking to borrow $500k, regardless of interest rates. In other words, when people are seeking to acquire a home (or borrow money) with more reasonable income/debt parameters, interest rates are not even close to a problem.
The increased rate is a bummer, but more like gas going from $4 to $4.50…it makes you pay more, but doesn’t stop you from buying.
Gas sales in the US are the same as in 1998.
Someone is buying less gasoline.
‘They are still incredibly low’
When foreclosures started to pick up, posters here reminded us it was “coming from a low base.”
‘fundamentals versus political turmoil inside the FOMC’
Or turmoil in Japans bond market? Or bond holder fear, when they realized, “I paid how much for this bond with no yield?” It occurred to me that the Fed may have already cut back on QE. Or that bond traders are fighting the Fed. Somebody is selling bonds and there was a lot of money lost in May.
“It occurred to me that the Fed may have already cut back on QE.”
My thought exactly. While they air their ‘debate’ on how soon to cut back on QE for the MSM, the alcohol content of the punchbowl is already getting weaker.
“It occurred to me that the Fed may have already cut back on QE.”
The latest weekly data I saw about a week ago showed that they HAD cut back on QE—but they had only cut back to the level that they previously had promised to buy.
IIRC, I was data showing that their weekly purchases were on the order of $10B (e.g. ~40B/mo). That was down SHARPLY from their previous week’s purchases, which had been on the order of ~$15B. Note that the latter figure is WELL above their committed rate, as it corresponds to a $60B monthly rate(!), not the promised $40B.
Or bond holder fear, when they realized, “I paid how much for this bond with no yield?”
I can share some personal anecdotal info here: a couple of months ago, I decided not to bother rolling over some 5-yr Treasuries that I had been laddering. The yield had declined so much that it didn’t seem worth bothering, as the yield was lower than I could earn in an FDIC-backed online savings account—so I moved the funds elsewhere instead.
Now rates have ticked up enough that they are above the yield on my savings account—so I am considering moving some back
“Soaring”
Freddie Mac’s chief economist, Frank Nothaft, has called for a 4% 30-year mortgage rate by year-end 2013.
However, they already hit 3.9% last week on loans under $417,500 (i.e. THE VAST MAJORITY OF ALL LOANS). So I guess they will have to either barely rise or even decline a bit through year end, or else breach 4% much sooner than year-end. If last month’s action is any indication, I’d guess they will soar past 4% well before 2014.
Mortgage rates may be heading higher
Julie Schmit, USA TODAY7:34 p.m. EDT May 29, 2013
Mortgage rates are moving higher, but are still near all-time lows.
Mortgage interest rates are back to their highest levels in a year — and may creep higher still.
After hitting a five-month low in early May, rates have made an abrupt turnaround
The average rate for a 30-year fixed rate mortgage for loans under $417,500 hit 3.9% for the week ended Friday, the Mortgage Bankers Association said Wednesday.
That’s the highest since May 2012, and up from 3.59% for the week ended May 3.
The latest increase spurred a 12% drop in refinance applications for the week, the largest single week drop in refinance applications this year, the MBA says.
The rise in rates has “been a very dramatic move,’ says Bob Walters, chief economist for Quicken Loans. “Mortgage rates have jumped more in the past week than they have in years.”
Rates had been trending higher all month on the strength of good economic reports. They really moved last week, Walters says, as markets reacted to mixed signals from the Federal Reserve that raised the possibility it might begin to taper its purchases of mortgage-backed securities and Treasury bonds sooner rather than later. Those purchases have helped keep interest rates low.
“That’s created a little panic wobble,” says Keith Gumbinger of mortgage tracker HSH.com.
Mortgage rates follow the yield on 10-year Treasury notes, which finished at 2.12% Wednesday, up from a low of 1.63% earlier this month.
Even if rates head higher from here, they won’t go very far, very fast, says Frank Nothaft, Freddie Mac’s chief economist.
“We’re seeing the first steps in a gradual uptick,” Nothaft says.
Freddie Mac reports its weekly survey data Thursday.
For the week ended May 23, it showed 30-year rates averaging 3.59%. Nothaft expects them to move above 4% sometime next year.
…
Let’s hope that rates continue their “gradual uptick” of the past month.
Could the War on Savers finally be coming to an end???? (Let’s hope so!)
Yeah four weeks ago the 52 week t bills I bought yield 0.102%. The latest batch I bought Thursday yield .13%.
Snoring.
I mean “soaring?”
Yeah four weeks ago the 52 week t bills I bought yield 0.102%. The latest batch I bought Thursday yield .13%.
When your yields are that close to zero, it’s hard to notice the difference.
But your yield actually went up by (.13-.102)/.102 == 27.45%.
Sure, the absolute numbers look snore-worthy—but not that kind of percentage change.
I’m sure you are holding those bills to maturity, so who cares, right?
If you watched the swing in 5-yr or 10-yr notes, the absolute did not look so small either. And with long bonds, they are more likely to be traded away before maturity as well.
Yeah that what gets them every time - rate of change is the thing you can’t hedge against very well. This is the world we live in now, a hyper fast digital age that moves so quickly only pre-programed trading algorithms can exist in the space-time quantum reality of international debt/equity markets. If there is a geiger-counter like indicator just watch how many times you hear Market Halted, a sure sign that ‘they’ have lost control of some segment of the market.
Should have said “last month’s” (i.e. May 2013)…
“The charts look like 1976 again for gold and stocks. But this ‘1976′ could be two or three years long before it turns into late 1976 through 1980.”
I’m still missing the point of this comment. For instance, what was inflation like in 1976 versus now? And was the Fed about to withdraw the punchbowl in 1976, as they are currently discussing?
Inflation in 1976 was much different because companies gave raises (those that didn’t buy into Fords WIN program(”Whip Inflation Now”)).
There were also union contracts that had built in cost-of-living adjustments, not to mention COLAs in federal government salaries.
Last time I checked, the federal government had a pay freeze in effect (for several years running now). And at the risk of inspiring a 2banana anti-Obama rant, where are the unions today?
Obama once bit my sister.
In 1976 there was a pause before another dive in the price of gold. It looks similar to what is happening now. We are in a pause. In 1976 the pause ended in July then a deep drop through September 1. Then steep recovery in the Fall.
I’m hoping the bottom in gold prices is beyond early October before the recovery.
Here’s a Kitco column about 1976 versus now:
http://www.kitco.com/ind/Radomski/2013-05-28-Can-1976-Give-Us-Insight-Into-Gold-s-Price-Behavior.html
The author talks the fundamentals favoring gold have not changed:
“Last month’s savaging of the gold price no doubt has left new gold investors shaken. But the reasons that led to the bull market in gold have not changed. If anything they are stronger than ever. Unless governments suddenly start balancing budgets, or unless central bankers suddenly stop printing money, there is definitely a good case for those who side with the gold bulls. But as of now, Japan and the US have embarked on a record quantitative easing policy. The speculators have been shaken out and gold has moved into stronger hands who have been buying up the physical kind to keep and to hold.”
Then he explains the technical side.
‘Junk bond issuance is at record highs this year-and thus at the greatest danger should yields start rising. Companies around the world have issued $254 billion in high-yield debt this year, a number that includes $130.6 billion from the U.S., according to the latest numbers from Dealogic.’
‘Global issuance is up a stunning 53 percent from the same period in 2012 and has accounted for 9 percent of the total deals in the debt capital markets space-also a record and fully one-third higher than last year’s pace.’
‘The U.S. issuance has increased 24 percent over the previous year. Record issuance also has come from the U.K., China, Russia-and debt-plagued Italy, which despite being at the center of the European sovereign debt crisis has seen $7 billion hit the junk bond market this year, Dealogic said.’
‘All that issuance suddenly would find a tougher marketplace, driving up yields and making borrowing for lower-credit companies significantly more expensive from the current yields which slipped below 5 percent in May.’
‘Citi said the exodus from high-yield has been due to “an expectation of faster liquidity withdrawal from the Fed” and warned that “as this occurs, capital flows are likely to turn negative, in our view, thereby limiting access to funding and maybe even increasing default concerns.’
http://finance.yahoo.com/news/junk-bond-volume-piling-trouble-080851761.html
‘the current yields which slipped below 5 percent in May’ - this is insanity.
‘maybe even increasing default concerns’
These guys at Citi are funnier than Leno or Letterman!
‘Junk bond issuance is at record highs this year-and thus at the greatest danger should yields start rising. Companies around the world have issued $254 billion in high-yield debt this year, a number that includes $130.6 billion from the U.S., according to the latest numbers from Dealogic.’
What effect does elementary economics suggest a glut of new issuance would have on junk bond prices?
You guessed it! The first-order effect of a supply glut is to drive down prices.
Can anyone tell me what happens to bond yields when their prices go down?
“Will housing heat up as buyers race to beat rising rates? The media loves this concept. A reminder how foolish so much media ‘analysis.’ In a long working life I’ve never once met a ‘not-buying’ client converted into ‘buying-now’ because rates are rising.”
This Realtor™ scare tactic holds no water, as rising rates reduce the amount buyers can potentially offer.
The last time we bought a home was during a period of rising rates. We were surprised to find a home available for purchase at a good price (i.e. much cheaper than renting).
Perhaps the fact that we had a 20% downpayment available had something to do with it.
That guy quoted needs to get out more or he’s making a deliberately disingenuous narrowly deceptive statement. Maybe not a not buying to buying now, but there’s plenty of fence sitters. In this economy I think a lot more than normally.
While the scare tactic may not work on someone who is smart and well informed, it works on lots of others because Suzanne researched it.
Nothing can save us from the marching morons.
Deflation Smackdown: Bernanke’s Madcap Money Printing Fails to Boost Inflation
By Mike Whitney
Global Research, May 31, 2013
Counterpunch
Region: USA
Theme: Global Economy
The US economy is in a liquidity trap which means that the demand for credit is weak even though the Fed is increasing the monetary base (via the creation of reserves at the banks) and interest rates are at zero. This is a serious problem. When the private sector (businesses and consumers) reduces its borrowing, activity slows, output shrinks, unemployment rises, and the economy slips into recession. That hasn’t happened yet, mainly because government fiscal support and transfers have kept growth in the black. But there are signs that deflationary pressures are starting to build. The consumer price index (CPI) has dropped for two consecutive months, revolving credit is showing new signs of weakness, and deposits at banks still exceed loans by a significant margin. Add the $85 billion across-the-board budget cuts, (sequester) and the prospects for a second-half double-dip look quite good. Here’s a clip from an article in Reuters that helps to explain what’s going on:
So credit growth is flagging and Obama’s contractionary economic policies have only made matters worse. It’s clear that slashing government spending when the economy is still weak–and the only areas of credit growth are student loans and subprime auto loans– is pure folly. (Note: Economists estimate that growth would be almost 2 percentage points higher if Congress and the administration put off the tax hikes and budget cuts until the economy was stronger.) The decline in credit card usage further illustrates that working people are still in deep distress and cutting-back wherever possible. Naturally, when consumer borrowing falters, aggregate demand weakens and companies scale back on business investment, which is apparent by the reduction in equipment and software purchases which slipped by 4.6% in the first quarter.
…
“It’s clear that slashing government spending when the economy is still weak–and the only areas of credit growth are student loans and subprime auto loans– is pure folly. ”
Let’s see. So you say we need more of those $787 billion stimuli? The first one was the GWB-signed stimulus while he was lame duck in the Fall of 2008. The second one was the Obama stimulus. They did not work. And the spending cuts (what spending cuts?) don’t work?
It’s June 1. The furloughs are now in effect. Maybe on the fridays off the furloughed government workers will create side jobs. I would deliver pizza at the very least.
Most people would argue that there is little difference if a government worker is on the job 4.5 days a week instead of 5 days a week.
True. In reality, lots of govt jobs are 24/7 anyway. Can you imagine a National Weather Service who works in Oklahoma taking off early for the weekend on a Friday afternoon when there is a tornado warning? Ain’t gonna happen…
You gotta be kidding me…..
http://www.nydailynews.com/life-style/real-estate/prospective-buyer-bum-rushes-door-new-long-island-city-condo-article-1.1352881
May 31, 2013, 4:12 p.m. EDT
Treasurys plummet in worst month since 2010
Prices turn lower after Chicago PMI, consumer sentiment
By Ben Eisen, MarketWatch
NEW YORK (MarketWatch) — Treasury prices fell Friday in a fitting end to the worst month for the haven government debt since December 2010, as investors nervously watch for potential changes to central bank monetary policy.
The 10-year note yield, which moves inversely to price, rose 3 basis points on the day to 2.139%, capping a 46 basis point rise over five consecutive weeks since the beginning of May. The 10-year yield rests for the weekend at its highest point since April 2012.
The 30-year bond yield rose 1.5 basis points to 3.284%, and the 5-year note yield rose 2 basis points to 1.035%.
Friday’s swing lower in prices illustrates the increased volatility in the bond market, with investors taking each economic data reading as indication of how and when the Federal Reserve may act to wind down, or taper, its bond purchase program, which has held yields at artificially low levels.
“The data in general is more of an excuse to move the markets around. Fundamentally, people are focused on what the Fed is going to do,” said Dominic Konstam, global head of interest rate research at Deutsche Bank.
…
PERSONAL FINANCE
June 1, 2013, 8:06 p.m. ET
Rising Stock Prices Flash a Warning…Selloff Ahead?
By GREGORY ZUCKERMAN
It’s time to become wary of stock prices.
The market’s impressive rally means stocks are at higher levels relative to their earnings than at any time in over three years, while also more expensive based on dividends and other valuation measures—all potential reasons for caution.
It’s not yet time to bail on the market. The economy is showing signs of improvement and stocks aren’t yet at troublesome levels. But the more extreme valuations go, the greater risk there is for a correction, analysts and investors say.
That may well have been on the minds of some traders Friday, when the Dow Jones Industrial Average dropped more than 200 points in the month’s last afternoon of trading—wiping out the week’s earlier gains.
Of course, the market is still up sharply for the year—the Dow having risen 15.35% and the Standard & Poor’s 500-stock index climbing 14.34%.
The impressive gains have come despite limp economic growth, continuing worries about the nation’s debt load and concern that Europe, China, emerging markets and other foreign economies remain weak.
Investors have set aside these worries to buy stocks, betting that the Federal Reserve will continue to support the market with easy money.
Near-zero interest rates from the Fed, along with its $85 billion a month in bond purchases, have helped encourage investors, many of whom are frustrated with the puny yields available in the bond market and in money-market funds, to shift money into stocks.
But that’s starting to change, making stocks less attractive on a relative basis. The S&P 500 currently sports a dividend yield of about 2.1%, below the 2.16% yield on 10-year Treasurys. Until recently, stocks carried a higher dividend, encouraging investors to shift to stocks.
Another big reason stocks have done so well: Shares have been reasonable values, based on a range of metrics, such as earnings and cash flow, even though the market has been rising for over four years, thanks to a robust increase in corporate profits.
Now, the market looks more expensive. The S&P 500 currently trades at 14.4 times its expected earnings over the next year, and 15.8 times profits of the past year, the highest level since May 2010. Earlier this year, stocks traded at lower multiples of 13.5 times expected earnings and less than 15 times earnings over the previous year.
“Valuations are stretched,” says Jack Ablin, chief investment officer of BMO Private Bank, who notes that profits are rising but revenues have been essentially flat lately, a potentially troublesome sign.
“Unless investors are anticipating a second-half economic rebound, stock prices will likely be constrained by tepid revenue and earnings growth,” Mr. Ablin says.
A metric favored by Robert Shiller of Yale University that measures stock prices against average corporate earnings of the last decade shows stocks to be more than 23 times earnings, well above the historical average of 16. Some favor this measure because using a decade of profits makes it less volatile.
“Given that profit margins are near 58-year highs and well above [by nearly 75%] their historic trend line and in light of the tepid top-line growth anticipated corporate profits seem close to their peak,” says Douglas Kass of Seabreeze Partners Management.
Not everyone shares these concerns, partly because P/E ratios aren’t at extreme levels. Current P/E ratios are just a tad above their averages over the past decade. Meanwhile, the Shiller metric made the stock market look expensive last year as well, just before stocks launched a 26% run-up.
…
Fundamentally
When Interest Rates Rise, Stocks Don’t Have to Fall
By PAUL J. LIM
Published: June 1, 2013
LOW interest rates have helped to fuel the stock market rally, and a climb in rates is eventually expected to snuff it out. At least that’s the theory.
Here’s the reality: In May, rates actually rose quite sharply, as 10-year Treasury yields jumped to 2.16 percent from 1.63 percent. Yet the Dow Jones industrial average still soared more than 400 points, to end the month at 15,115.57.
The stock market’s road did become choppy as rates rose. The Dow lost more than 200 points on Friday, for example, but the overall trend remained upward. It just goes to show that while there is a connection between interest rates and the stock market, it isn’t a simple one. When rates rise, said Jeffrey N. Kleintop, chief market strategist at LPL Financial, “it is not the size of the move itself, but the absolute level of yields reached that matters to the stock market.”
Even with the recent uptick, the 10-year yields are only about half of what they were five years ago, during the global recession. And a climb in rates from such a low level may be a tail wind — not a headwind — for stocks, Mr. Kleintop said.
For starters, he said, “it reflects an improving outlook for economic growth and less risk of deflation.” Both are welcome developments to equity investors. Moreover, “it results in losses for bonds,” he said, which may prompt investors to sell those bonds and move money into stocks.
…
http://business.financialpost.com/2013/05/31/canadas-last-safe-haven-under-pressure/
‘Statistics Canada data released this week showed foreign investment in Canada tumbled in the first quarter to $15-billion from roughly $60-billion — the largest quarter-over-quarter decline on record. Investment in stocks and funds experienced a net outflow of $9.5-billion during the period, the largest pullback since the fourth quarter of 2007, while currency and deposits declined by $11-billion. But bonds continue to be the one asset bucking the trend. Foreign demand for Canadian bonds remained healthy in the first quarter with $25-billion in purchases — the highest level since the third quarter of 2010. Most of the bond buying came from the secondary market, suggesting investors still have an interest in actively buying Canadian bonds, rather than just waiting for new issues.’
‘But enthusiasm for Canadian bonds could dwindle if market sentiment about Canada’s economic performance continues to wane.’
‘Tom O’Gorman, director of fixed income at Bissett Investment Management, which is owned by Franklin Templeton Investments, points out that one bad month is unlikely to reverse investor’s love affair with bonds — especially Canada’s bonds. “While May has been weak, what everyone needs to be reminded of is that yields are still at a level that can be considered historical lows, and levels that you would expect during an ongoing financial crisis,” he said. “After all, 2% [for the 10-year Canada bond] is not anything that would be considered high.”
‘Mr. Pollick also doesn’t see investors leaving Canadian bonds, even if he does raise concerns about their attractiveness as an investment, given the possibility of higher interest rates from the Bank of Canada. “What you’re starting to see is the pace of incoming funds starting to slow down, but it doesn’t mean you have people that are leaving the Canadian bond market,” he said. “It’s just they’re coming in at a much slower pace.”
The Mayor of Toronto isn’t the only one smoking crack.
“But bonds continue to be the one asset bucking the trend. Foreign demand for Canadian bonds remained healthy in the first quarter with $25-billion in purchases — the highest level since the third quarter of 2010.”
That was so first quarter.
May 31, 2013, 3:53 p.m. ET
Canadian Bonds Struggling After Strong Canada, US Data
By Don Curren
TORONTO–Canadian bonds are struggling Friday morning, sliding lower across the whole yield curve after a barrage of stronger-than-expected economic data on both sides of the Canada/U.S. border.
Canada’s two-year bond yield is at 1.088% Friday, from 1.079% Thursday, according to electronic trading platform CanDeal. The 10-year bond yielded 2.089%, from 2.066%. Bond yields move inversely to bond prices.
News that Canada’s GDP was up by 2.5% in annualized terms in the first quarter, ahead of expectations of 2.3% and the Bank of Canada’s forecast of 1.5%, put pressure on the market in early North American trading, and it didn’t relent during the rest of the morning.
Statistics Canada also reported that GDP improved at a 0.2% pace in March, boosted by gains in Canada’s export sector and higher spending on services.
The data was slightly higher than expectations of a 0.1% gain.
…
Capitol Report
Bankers tell Fed they support reduced government role in housing — eventually
May 31, 2013, 4:12 PM
Federally controlled mortgage buyers Fannie Mae and Freddie Mac should be contracted over time, but there’s still a role for the government to provide a guarantee for securities in emergencies, bank industry representatives recently advised the Federal Reserve.
At a May meeting members of the advisory council voiced support for a proposal from a major bipartisan report released earlier this year that recommended the creation of a “public guarantor,” according to council minutes released Friday. The guarantor role would put the government in a fourth-loss position. That is, in the case of loans gone bad, the government would be on the hook only after borrowers, private insurance, and issuers and servicers.
“The public guarantor would have a minor presence in the market in normal times but maintain the ability to increase its participation dramatically if private capital were inaccessible,” according to the minutes.
However, some advisory-council members spoke of concerns about “mission creep.”
They added that would-be housing-finance reformers face several major headwinds. For one, the government is happily receiving dividends from Fannie FNMA and Freddie FMCC – payments that are cutting the federal deficit. Also, on the back of a strengthening housing market, the companies recently reported improved quarterly earnings – results that could cut the urgency for reform.
Also at the May meeting, the banking representatives complained about the Fed’s asset-purchase program, saying it has “created systemic financial risks and potential structural problems” for financial institutions.
The advisory council has 12 members – one for each regional Fed bank’s district — including representatives such as James Gorman, Morgan Stanley’s chief executive. The council meets four times a year.
–Ruth Mantell
Bankers tell Fed they support reduced government role in housing — eventually
Yeah, as soon as it can bubble on its own.
This is like agreeing “in principle.”
Has the Fed permanently redefined its mandate to include housing price support, or is this a temporary measure?
Fed buys $12.2 billion of mortgage bonds, sells none
NEW YORK | Thu May 30, 2013 2:27pm EDT
(Reuters) - The Federal Reserve bought $12.2 billion of agency mortgage-backed securities from May 23 through May 29, less than the $15.3 billion it purchased last week, the New York Federal Reserve Bank said on Thursday.
In a move to help the housing market, since October 2011 the U.S. central bank has been using funds from principal payments on the agency debt and agency mortgage-backed securities, or MBS, it holds to reinvest in agency MBS.
…
Fed hawks call for retreat from mortgage stimulus
Federal Reserve Bank of Dallas President Richard Fisher speaks about the concept of breaking up ‘too big to fail’ banks to a breakout group at the Conservative Political Action Conference (CPAC) in National Harbor, Maryland, March 16, 2013. REUTERS/Jonathan Ernst
By Kristen Hays and Francesca Landini
HOUSTON/MILAN | Thu May 16, 2013 5:51pm EDT
(Reuters) - A trio of hawkish regional Federal Reserve officials are calling for the U.S. central bank to stop buying mortgage-backed bonds, citing the recent improvement in the housing market.
Richard Fisher, President of the Dallas Federal Reserve Bank, was the latest to point to the recent pick-up in home values and housing construction as signs the central bank’s purchases of mortgage-backed securities are no longer needed.
“We can rightly declare victory on the housing front and (reduce) our purchases, with the aim of eliminating them entirely as the year wears on,” Fisher told the National Association for Business Economics on Thursday in Houston. “I believe the efficacy of continued purchases is questionable.”
His thinking leaves him in a minority at the central bank. Regional Fed presidents rotate into voting seats on the policy-setting Federal Open Market Committee, while board members, who tend to be more sanguine about the effectiveness of the Fed’s bond-buying stimulus, are permanent voters.
That means Chairman Ben Bernanke generally leads the way and he still appears reluctant to take his foot off the accelerator with the recovery still fragile and inflation heading lower.
Speaking in Milan, Philadelphia, Fed President Charles Plosser said the central bank should dial back its asset buying starting next month, given the improving economic backdrop.
“Things are better enough for the Fed to slow the pace of purchasing if we are really serious about the fact that (the purchase program) is scalable,” he said.
In a speech late on Wednesday, Richmond Fed President Jeffrey Lacker offered much the same message.
“When you look at housing market conditions, I think you could make the case that we should be getting out of mortgage-backed securities,” Lacker told reporters after a speech.
…
No bubble here, folks…move along.
The Frannie gamble
By Felix Salmon
May 29, 2013
This is a three-year chart of Fannie Mae’s common stock, which fell almost 30% today; it’s now at a level not seen since Friday afternoon. You can think of this as shares “getting destroyed” if you want — but really what we’re seeing here is little more than a game of chicken between traders who find it easier to day-trade from their desks than to jet to the 32nd floor of the Galaxy Macau casino for the weekend.
Every so often the financial markets throw up a security which doesn’t make any sense from an intrinsic-value perspective but which traders love to trade anyway. A large amount of cocktail chatter than springs up around the question of whether this is all just a game, where traders try to second-guess each others’ moves, or whether there might actually be some value buried in there somewhere.
Examples are easy to find: AIG stock circa January 2010, for instance, or credit default swaps on the USA a year earlier. For people who have internalized the efficient markets hypothesis, the fact that such things have value means that there has to be a credible story explaining where that value might lie. And sometimes there is: AIG is now a genuinely valuable company, and shares which were trading at a silly $29 in January 2010 are now trading at a pretty sensible $45.
The Frannie trade is interesting because it’s basically a bet on the US government taking pity on various different classes of shareholder. The common stock is pure gamble, but there’s real money being invested in the preferred stock, which is being held by the likes of John Paulson and Jim Millstein, the man who managed to unlock the value in AIG. Millstein explained the bull case to Nick Timiraos:
The problem is that while the government might well get its money back, in nominal terms, from Fannie and Freddie, the $188 billion in debt is still outstanding: the $132 billion in dividends has not paid down a penny of the debt. Since the debt is first in line for any payout from the companies, there’s no particular reason to believe that the preferred stockholders, who are next in line, or the equity holders, who are even more junior, are ever going to see any money at all. The government can keep on dividending out as much money as it likes from Frannie, and still hold onto 188 billion reasons why no one else should ever get anything.
Of course, if the government wanted to recapitalize Frannie and give the companies back to their current shareholders, it always could. But that doesn’t seem likely — especially given how fiscally conscious most of Congress is, these days. And certainly there’s been nothing in recent weeks to justify the massive run-up in the prices of the preferred and the common shares. Rather, what we’re seeing is textbook speculation: people buying shares just because they think a greater fool will be willing to jump onto the momentum trade in the future. If you time it well, you can make a lot of money with that strategy.
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Hi All
Not visited you all in a long time……have given up on California and we are moving to Pennsylvania, near Philadelphia - does anyone local to that area have some good insight into the houses and school districts around Wayne? Or close to there?
We finally plan to buy a house - recommendations?
Thanks
Claire