Upward pressure on interest rates continued to build last week, although 30-year mortgages held at 5.75 percent. The all-important 10-year T-note maintained a tenuous grip below 4.2 percent, but more good economic news – or the Fed – could cause an upward break at any moment.
The inflation reports were ideal: core producer prices fell .1 percent in June, and core CPI increased only .1 percent. June retail sales soared 1.7 percent, and excluding artificially boosted auto sales still had a strong .7 percent gain. Deals offered by Ford and GM have reached a new level of giveaway (all buyers get the employee discount) – anything to keep production lines going. There is no profit, but sales and production count in the real world, keeping suppliers in business and employees at work.
The gain in industrial production doubled expectations, up .9 percent (autos again, partly), and industrial capacity in use reached the important 80 percent level – 10 points above blown-bubble bottom in ’02. Consumer confidence surveys are improving, especially in a “jobs-are-plentiful” attitude.
Tax revenue is now running $100 billion over the ’05 forecast. Politicians are all over it, left-side quibblers dismissing a one-time increase from real estate and stock sales, and the Republicans declaring budget victory.
Forget the posturing (both sides are mistaken): economies generating $100 billion in surprise revenue are doing pretty damn well, thank you – well enough that the Fed has reason to worry about leftover liquidity from the bubble-rescue percolating into speculation or inflation. The much-anticipated economic slowdown of last spring, the one sure to follow an aggressive Fed, is nowhere in sight.
The behavior of interest rates from short to long maturities continues to be peculiar, and a new pattern is developing now. The last year of Fed tightening pushed up short-term rates, but left long ones unusually low. Now the Fed is creating a bulldozer effect, shoving all rates upward in a single heap.
In the last week, as it has become clear that the Fed will keep going after a hike to 3.5 percent on Aug. 9, all Treasury rates have risen toward convergence. The most Fed-sensitive 2-year T-note has gone from 3.58 percent on July 8 to 3.85 percent on Friday, and the 5-year from 3.67 percent to 3.99 percent, each three times the move in the 10-year T-note from 4.08 percent to 4.18 percent. There may be a recession-signaling inversion up in the fours somewhere (if the Fed went to 4.5 percent in January, and the 10-year began to sink toward 4 percent, then look out below…), but it seems more likely that all rates will rise with the Fed, very grudgingly at the long end, until the Fed thinks it has reached equilibrium.
This bulldozed heap already shows in mortgage rates. Teaser rates aside, assuming no points or origination, the rate Friday for every mortgage in America – fixed, adjustable, conforming or jumbo – is somewhere between 5.5 percent and 6 percent.
OFHEO, the regulator for Fannie and Freddie, has published a brief but extraordinary study: “Single-Family Mortgages Originated and Outstanding: 1990-2004.” It opens by describing the unreliable and approximate data available on mortgages, even at the Fed.
The tables following show some amazing things: $8 trillion total outstanding, $1.4 trillion ARMs; FHA and VA mismanaged to insignificance, only 8 percent of the total.
There was a surge in ARM borrowing in 2004, but it was very much the same as in two prior years of Fed tightening: 1994 and 2000. Rates came down after those two peak-Fed years, leaving ARM borrowers feeling impervious to the Fed. This time, the Fed has tightened for two years, and its cyclical peak may be years away.
Awareness of the inevitable ahead has hardly begun among ARM borrowers.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.
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