The Fed’s FOMC meeting announcement on Wednesday started a small landslide in the global equity markets.
Home mortgages followed the down trend, sending APRs below 4%. Both the 10-yr T and the home mortgage markets rebounded slightly on Friday, but the bullish trend in interest rates is still present. What caused the huge step on Thursday? Do you recall the sign candidate Bill Clinton kept on his campaign headquarter door?
“It’s the economy, stupid!” Thursday’s huge sell off in the global stock markets was a reaction to the Fed’s comments. Operation Twist was anticipated. But when the announcement actually came out, the Fed’s language to justify their move caused a bit of a surprise and shook some already nervous investors. It came down to one word really.
“Significant”. As in describing the “downside risks to the economic outlook”. Many in the world look to the US Federal Reserve as the best forecaster of what lies ahead for US companies and their stock performance. When the Fed comes out and says that future has significant downside risks, investors react. And flocking from equities to bonds is what we saw. See the entire 6-paragraph FOMC Statement by clicking here.
The other surprises in the announcement included
- an expansion of Operation Twist to $400B vs the expected $300B, and
- a reinvestment policy that will shift dollars over to Mortgage-Backed Securities (MBS)
This latter point, showing love to the MBS world, will drive more demand and strengthen bonds that allow banks to sell off their packaged mortgages at lower yields, making it likely they can be profitable when making lower-rate mortgages. This is part of the medium-term bullish stand on mortgage rates. The other favorable outlook for interest rates is the continuing saga of the Eurozone.
What seems to be inevitable, the exit of Greece from the EU and ultimately, the breakup of the Euro currency, continues to be delayed. This delay and the final event both push investors to more secure havens. And even with a significant downside to the outlook projected in the US, there is still no safer place to invest than US Treasury securities.
There is one big question mark on near term future interest rates. It is getting very little attention and the FOMC statement simply swept it away, but the Core Inflation number for August was slightly above the targeted 2.0% level. And the headline inflation number is near 3.5%. The Fed believes the downward pressure on oil prices will reel-back-in the inflation level. But this is the one thing that can shoot interest rates right back up, a n inflation number settling in at or above 2.0%. This is likely the driver behind 3 of the 12 FOMC voting members dissenting. We’ll know more when the full minutes are issued in 3 weeks.
Commercial loans continue to get approvals and rates are improving below already low levels. Refinancing ahead of the future rise in rates is now even more inviting. Typical commercial mortgages either rollover to a new rate or have a balloon payoff (full-stop refinance) required every 5 years. Having a loan come due for a new rate in the 2013-2014 period is a scary proposition. Refinancing with Signet and locking down today’s rates with no balloon payments and programs that never require another refinance is a very wise strategy. We have property owners recognizing this and incurring a prepayment penalty today just to get into these more beneficial loan terms and avoid future refinances altogether. The numbers pencil out.
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