By Mike Shedlock / Mish | 30 October 2007
Curve Watcher's Anonymous is once again eying the yield curve and mortgage rates following yet another set of horrible existing home sales and news home sales numbers.
Yield Curve As Of 2007-10-24
click on chart for a sharper image
There has been a strong rally in treasuries (lower yields) in conjunction with consistently weak economic data. However, in spite of a 100 basis point (1%) cut in the discount rate, and a 50 basis point (.5%) cut in the Fed Fund's Rate as compared to a year ago, Curve Watchers are noting that 30 year mortgage rates are almost exactly where they were a year ago, and 1 year ARM rates are substantially higher than a year ago. 15 year fixed rates are lower than a year ago, but only by a mere 11 basis points.The picture is even worse than it looks however, because the above rates are for prime borrowers with a reasonable down payment. Subprime borrowers are facing resets substantially higher. Someone struggling to make a home payment at a teaser rate of 3% is going to be in serious trouble at 9%.
With that in mind, Curve Watcher's Anonymous is noting a striking similarity between recent yield curve action and that in 2001. Let's take a look. |
Yield Curve 1999 - 2007
click on chart for a sharper image
In the above chart
$TYX is the yield on the 30 year long bond.
$TNX is the yield on the 10 year treasury note.
$TYX is the yield on the 5 year treasury note.
$IRX is the discount on the 3 month treasury bill.
Take a good look at the above chart. Haven't we seen this series of plays before?
There's only three small problems. The last time the Fed embarked on a slash and burn campaign lowering interest rates, the U.S. dollar index was sitting near 120, gold was near $300, and oil was near $20. Now the dollar index is well under 80, gold is close to $800, and oil is over $90.
The second problem is the Fed created a housing bubble (and lots of jobs) the last time they tried slashing interest rates. Who needs a house now that does not already have one (or two or three)? Should the Fed dramatically lower rates again, where are the jobs going to come from? [[Can you push a wet noodle uphill?: normxxx]]
The third problem is that drug ([[artificially low rates: normxxx]]) induced highs need stronger and stronger doses to maintain the same high. There is not much room below interest rates of 1 to even think about a higher high [[besides, we stopped at 1% last time, because any lower and all of the MM Funds would have gone BK: normxxx]].
High energy prices and falling home prices are two things of concern to consumers. The irony of the situation is that the only way oil prices are likely to sink is if the U.S. heads into a recession and/or the dollar strengthens considerably.
The Irony of Bernanke's Predicament
Bernanke is acting to prevent said recession by cutting rates. Good luck with home heating season coming up. If Bernanke does not cut rates, it will hasten the recession. A recession is badly needed I might add, but Bernanke does not see it that way.
In addition, the U.S. Dollar is likely to rally if the Fed pauses because rate cuts are priced in. Given that the dollar and the stock market have been inversely correlated for quite some time, if Bernanke acts to shore up the dollar by failing to cut rates, the stock market is likely to take a big hit.
There are no winning moves. But— Bernanke, it's your move.
Normxxx
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