Treasuries and mortgages started better this morning but couldn't be completely sustained as the day wore on. Nothing but talk of whether or not the 30 yr fixed rate can get to that elusive 4.5% that the NAR made famous months ago. It got burned in consumer minds and likely did some disservice to many buyers that found themselves having to accept higher rates as rates inched up for to months. Now we are back to the lows once again (4.875%) and the question is back again. The short answer is that it is unlikely mortgage rates for basic 30 yr vanilla mortgages will fall to 4.5%.
Getting to 4.5% would require treasury rates to decline another 50 basis points from present levels, the 10 yr down to 2.0% area. That is a huge mountain to climb;
- Treasury borrowings will total about $1.75T this year from 2s to 30s.
- Mortgages are very unlikely to get enough investor interest to accept mortgages at 4.5% with property values still declining.
- 4.5% on 30s would set a new all-time record low (since 1955), not likely in this environment; at 5.00% mortgages are at 50 yr lows now.
- Mortgages still have a rank smell to them after the losses on sub primes.
- Banks will not get aggressive in their buying and likely will drag feet if mortgage prices continue to increase.
- When the Fed announced it would purchase $500B of mortgages last Dec, mortgage rates fell to where they have today; now its $1.25T in mortgage purchases and $300B of long term treasuries (10 yr notes) and interest rates unable to crack technical resistance levels.
- Warehouse lending is almost dried up, that will filter down to consumer prices and rates.
- Inflation, not now, but coming; will be a hurdle for investors making fixed income investments.
- Many impediments to lower mortgage rates; all that said, it will take a day or two to completely sift out the reactions from the Fed yesterday.
The one caveat; if the Fed continues to buy MBSs and treasuries the 4.5% level could be reached, but we see that as a real long shot.
The move by the Fed yesterday has kicked the legs out from the dollar; it has fallen $0.06 against the euro and 2.50 cents against the yen in 24 hours (both big moves). Gold is up $70.00 today and $20.00 yesterday on dollar weakness. Crude oil up $3.50 to over $51.50. All commodity prices are increasing today.
The Conference Board's index of leading indicators, a gauge of the economy's direction over the next three to six months, fell 0.4% in February, less than -0.6% forecast.
Bill Gross (PIMCO) said the Federal Reserve's purchases of Treasuries and mortgage securities won't be enough to awaken the economy. "We need more than that," Gross said today in a Bloomberg Television interview from PIMCO's headquarters in Newport Beach, California. The Fed's balance sheet "will probably have to grow to about $5 trillion or $6 trillion," he said. Presently its balance sheet is at $3.15T with the announcements yesterday (when they actually do the deeds).
There are no economic releases tomorrow. Markets will work on weekend adjustments. The Apr crude oil contract expires tomorrow; on Monday May will be the spot price, May is $0.50 higher today than the May contract.