Mortgage rates have improved ever so slightly, to 6.25 percent with the lowest fees, but not because of any change in the economy, just the conclusion of a weeklong borrowing binge by the Treasury.
I think that mortgage-rate risk is still tilted upward, unless and until news of a significant economic slowdown, especially in the labor market. The next definitive data on jobs are three weeks away, but other events — Fed and market — are adding to tension and setting up bonds and mortgages for a significant move.
In the short term, the biggest market-mover will be Federal Reserve Chairman Bernanke’s first official remarks next Wednesday in testimony to Congress. The Fed will not meet again until March 28, but Bernanke’s appearance will tend to addle the markets. First, of course, will be the impact of any hint about inflation risk and the Fed’s interest-rate intentions. Second will be general unease in the markets, internal fidgeting at the thought, “Does this guy know what he’s doing?”
Third will be the change in style: Bernanke speaks in clear and grammatically correct English sentences. He says he is determined to run a more open and transparent Fed, and old hands in the bond market think that on this point he is out of his ever-lovin’ mind. Old timers are sure that a great deal of any chairman’s power flows from secret decision-making and foggy public statements.
We think so for the following reasons. First, the Fed chairman often does not know what to do next. It’s not a good idea to say so. Better to appear in deep and complex consideration, beyond the ken of mere mortals, and to make murkily descriptive statements, but never inform. Second, when the Fed chairman does know what to do next, it’s a very bad idea to say precisely why. If the chairman opens up, he is certain to get an argument and diminish the authority of The Oracle.
If you know what to do, just do it. Excessively graphic descriptions of discomfort, complications, and uncertainty before performing, say, a prostate biopsy, tend to make the patient squirm at a bad moment. If you’re the Fed chairman, the last thing that you want is a bunch of squirming and argumentative politicians and traders.
In times void of economic data, the bond market often takes cues from itself. This week the Treasury borrowed $47 billion in new cash, two-thirds of it by selling long-term bonds, half of those the first 30-year Treasurys in several years. As is common, rates rose in the week before the sale, and fell upon yesterday’s conclusion. Given the market certainty that the Fed has at least another .25 percent to go, to 4.75 percent in the overnight cost of money (“Fed funds”), the improvement was modest. However, the change in pattern across maturities has been extraordinary.
A 2-year T-note pays 4.65 percent today, a 5-year 4.54 percent, a 10-year 4.53 percent, and a new 30-year T-bond pays 4.5 percent. That’s an “inversion,” short rates higher than long, the classic sign of substantial economic slowdown ahead. Why buy a long bond when a short one pays more? Only if you think that an economic downturn will cause the Fed to reverse course, cutting short rates.
All very nice and classic. However, the inversion is shallow, might be explained by excessive bidding for a global shortage of secure long-term investments, and by sky-high long-term American interest rates, which are at least 1 percent higher than any comparable credit risk (the German 10-year Bund pays only 3.48 percent). As the next Fed hike approaches, Treasurys may do exactly what they did before the last one: yields on all maturities rising another .25 percent.
A deepening inversion would be good for us, a warning to the Fed to cool it. The hunch here: the Fed is already on the edge of bursting a housing bubble where there was not one in the first place.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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