Are rates pulling back?

September 25th, 2007, 7:28 am · 7 Comments · posted by Mathew Padilla

The yield on a 10-year Treasury slid a tad this morning to about 4.57 percent, as I write this. That should be good news for mortgage applicants and people refinancing because home loan rates are usually correlated to the 10-year Treasury.

After the Fed cut two interest rates by half a point last week, the 10-year yield actually rose from under 4.5 percent to nearly 4.7 percent. So does today’s move back down mean some inflation worries have eased?

First, let’s recap.

Aaron Kopelson of Loan Link Financial Services wrote in an email newsletter today:

Initially, both Stocks and Bonds rallied on the comforting words from the Fed — but as Bond Traders analyzed the potential future impact of the Fed cut over the following days, they started selling off Bonds with both hands, causing fixed home loan rates to rise by .125 to .25%, actually higher than where they stood before the Fed Rate Cut. What happened?

Traders realized that a Fed Funds Rate cut could encourage increased spending by consumers and businesses, as borrowing costs will now be cheaper for Home Equity Lines of Credit, consumer loans like car loans and credit cards, and business loans as well.

In turn, increased spending can translate into increased inflation in the long run — and inflation is bad news for Bonds. Bonds deliver a fixed rate of return, and the value of that return is eroded by inflation. So Bond Traders sold, the price of Bonds moved lower, and home loan rates moved higher as a result. Counterintuitive to many…but it’s reality, and now you understand what many do not - including much of the mainstream media.

So what’s next on inflation and rates? Kopelson says keep an eye on Friday’s “big enchilada, the highly anticipated Personal Consumption Expenditure (PCE) Index. Why is it so important? Because this is the report the Fed watches most carefully to gauge consumer inflation.”

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Byron says:

September 25, 2007 at 9:27 am

I’m less worried about inflation today than I was right after the Fed rate cut. The consumer is clearly slowing down, job losses are mounting and I believe we’ll see corporate earnings take a big hit in the 4th quarter. Plus, the fed cut won’t necessarily mean greater liquidity in the consumer markets. Tighter credit standards will prevent that capital from reaching the consumer.

My remaining inflation concerns rest with the persistent high price of commodities…prices fueled by strong and growing economies overseas. Robust overseas consumption may well keep prices in the U.S. high despite the increasing anemia of our own economy. I think we have at least 2 years ahead of us that are going to be very difficult.

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Mikey Likes It says:

September 25, 2007 at 10:30 am

The 10 year bond is now in the same narrow range it was late last year/early this year (4.5% to 4.75%). Conforming mortgages should settle in accordingly. Jumbos seem to still be elevated. Anybody have a good, current data source on those?

graphrix says:

September 25, 2007 at 12:10 pm

One thing Aaron didn’t comment on is that mortgage bonds trade on their own and do not nessicarily follow the ten year. Yes typically it is a good gauge but mortgage bonds sell before treasuries and are bought after treasuries. Even the fannie mae conforming mortgage bonds may have investors seeing risk and they could move from mortgage bonds to treasuries causing mortgage rates to go up and treasury rates to go down.

Mikey Likes It,

I have access to a lender’s rate sheet and a conforming 30yr fixed rate would be 6.25% at par (in other words you would have to pay a abourt a 1% origination fee) and about week ago it was nearly the same at 6.375% but the origination fee would be slightly less. Jumbo is much higher and it would be 7.5% and cost about 3%. This is exactly what it was last week. This is just one lender and I am sure better or worse rates can be found but they are what one local lender offers.

AStr8Arrow says:

September 25, 2007 at 1:56 pm

Matt

Where do you find these Mortgage Experts? I see you post Loan Link quite frequently here and in your acrticles…….Any connections?

Check out his credentials on the DRE Website under DRE Records.
Make sure to note Experience ( Length of time as Licensee) and Comments.

cc says:

September 25, 2007 at 6:35 pm

Aaron (the expert) actually gets his “knowledge” from a weekly newsletter he subscribes to. His commentary is actually the work of Barry Habib at Mortgage Market Guide. Check out the link MMG Weekly at Aaron’s web site http://www.strategichouse.com. It’s not his work.

September 25, 2007 at 9:57 pm

Yep that is Barry word for word. I still like Aaron though. His blog makes for some good reads.

Eric says:

November 20, 2007 at 6:18 am

Eric

Thanks for share your experience, by the way ,great tips huh..

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