Long-term rates fell to a new post-April low yesterday, but are giving back the gain today. The 10-year T-note traded as low as 4.06 percent (back to 4.12 percent now), and the lowest-fee 30-year mortgages briefly made it to 5.625 percent.
The rally yesterday broke through “technical resistance,” which often precedes a deeper decline, but I think this time will not. We are sitting here, barely a half-percent above the all-time mortgage low; the Fed is going to raise its rate from 1.5 percent to 1.75 percent on Tuesday, and again to 2 percent before the end of the year, and there is just not room above the rising cost of money for long-term rates to fall.
For bonds to fall below 4 percent and mortgages under 5.5 percent, we need the economy to slow enough to knock the Fed out of its back-to-neutral campaign. That development is not in prospect: August retail sales fell .3 percent but rose .2 percent, excluding sick autos; August industrial production gained only .1 percent, but July was revised up to a healthier .6 percent gain and industrial capacity in use has stopped its decline at 77.3 percent.
Not hot, not bad. Not as good a Goldilocks hopes, but tolerating the $45/bbl oil-price tax pretty well. As PIMCO’s Paul McCulley said yesterday, the economy is a “Velveeta on white bread” affair.
Expect rates to stay near here until something happens. And, on the economic something-happening list, the election outcome is not even in the top 11: jobs, the consumer, energy, the trade deficit, China’s landing, the dollar, stocks, the Fed, the budget, out-year entitlement promises, and tax revenue are each more important issues, and each will tend to deny the presidential winner(?) any room for installation of partisan policy.
For bonds to break resistance and fail in follow-through is another of the market anomalies that today seem to outnumber market normalities. At the center of the largest collection of unusual market conditions is the spreading insight that investment returns of all kinds in this decade are likely to be on the low side. The evidence is stark: try to find a market – any market – that looks undervalued.
You can’t have much chance for big upside without a shortage of current price versus long-term value. Super-low inflation has produced super-low interest rates and super high prices for bonds – there was no follow-through to yesterday’s bond rally because no sensible person expects to find a buyer at prices higher than yesterday’s. Oil, gas, gold, and the other inflation-loving tangibles are as high as they can go without some inflation. August CPI rose .1 percent, as the annualized core rate never got above the feared 2.5 percent level, and may be falling below the equally feared 1 percent level.
Lifetime lows in rates and inflation produced the stock market bubble, and emergency easing by the Fed put enough gas back in the bag to hold up the string. However, a lot of tough-minded pros are letting cash accumulate in portfolios, and many are saying tiredly of stocks, “There are only so many good business ventures at any given time.” A ton of money looking for a home tends to prevent nosedives in any of these overbought markets, but upside is damned hard to find.
Which leaves real estate, especially residential. Voices all through the frustrated financial markets are crying “Bubble!” at houses, and the accuracy of the accusation belongs on that list of economic questions more important than who-gets-to-be-president. Last night I plowed through Robert Schiller’s (yes, the man who called the moment of exuberant doom for stocks) housing bubble study in Brookings, and I am amazed – flabbergasted – at the deficiencies in the analysis.
The upside in home prices is limited from here, and there are mortgage effects that will be painful for some, but a bubble? No way.
Next week I’ll give a detailed deconstruction of the bubbleologists.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
What’s your opinion? Send your Letter to the Editor to firstname.lastname@example.org.