Bulls & Blogs

Rate update: My biggest fear

Interest Rates, Residential Mortgage Comments Off

Oct 092019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates seem to be range-bound once more. After the decidedly weak manufacturing and services sector reports last week, that may be a bit of a surprise. The talking heads predictably spouted doom and gloom scenarios of a pending recession, but it seems like investors weren’t listening very closely. Rates initially retreated on the headlines, but since then have held steady.

So, what is likely to be the next source of inspiration for rates?

I think the most important economic data to watch at this point are the confidence measures. Business confidence has been lagging most of the year due to the ongoing trade dispute with China. However, consumer confidence has been sky high. That may be changing – possibly due to uncertainty created by the impeachment drama or the constant downbeat news from the press or maybe something else. My biggest fear is that we talk ourselves into a recession.

If consumers pull back, the economy could erode quickly, which would lead to much lower rates as we close the year. Given the political considerations – election next year – I suspect political operatives will do what they can to encourage that erosion. Thus, I put higher odds on lower rates before the end of the year.

I think the most important economic issue still is the trade dispute with China. Earlier in the year, I was betting on at least a partial resolution, which I said would lead to higher rates. However, given our current political dysfunction, I doubt China will want to deal. We may see a temporary reprieve from some of the sanctions, which could tickle rates higher for a short time, but I expect the dispute will continue to dampen both domestic and global growth, which would keep a lid on interest rates.

Rate update: Reasons rate should be lower

Interest Rates, Residential Mortgage Comments Off

Sep 162019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

What a difference a couple weeks make. Last week, the press was reporting the lowest mortgage rates since 2016. This week? Well, we lost a little ground. Rates rose about half a point in two weeks.

So, if you approach decisions cautiously (like I do) and didn’t jump into a refinance, are you out of luck? I think not, but you may have to practice a bit of patience. Last week’s bounce higher may have been nothing more than a market reaction to the rapidity with which rates fell at the end of Aug.

Recall back to earlier posts when we discussed the reasons rates were falling: Europe appears headed for a recession, Brexit remains unresolved, and China’s economy is slowing dramatically due to the ongoing trade dispute. On top of that, talking heads have spent the summer trying to talk the US economy into a recession. Little has changed to mitigate those concerns.

Given that, I think it’s likely rates will ooze back down again. The question is when. Here’s what I’m watching:

The Federal Reserve meets this week, and pretty much everyone expects it to cut short term rates by a quarter point. That’s already priced into rates. What I’ll be watching is what the Fed puts in its post-meeting announcement and what Fed head Powell says at his press conference. If the Fed doesn’t acknowledge ongoing risks to the economy, rates will remain elevated longer.
Second, US manufacturing data has been soft, but consumer data has remained strong. If consumers stop spending money, the US economy will be headed for a soft patch, and that will move rates lower.
Finally, the trade war with China is hurting both countries, but it seems to be hurting China more. That may be softening China’s resistance to compromising on some of the thornier issues. A complete resolution seems unlikely anytime soon, but a thawing of positions might give markets confidence in the US economy and keep rates higher.

Rate update: The big reason mortgage rates aren’t lower

Interest Rates, Residential Mortgage Comments Off

Aug 142019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Trade uncertainty last week set off a feeding frenzy in the bond market. Investors gobbled up Treasury bonds in a flight-to-safety buying spree that saw the 10-year rate drop by 40 basis points (0.4%) in just over a week. The 10-year rate is now the lowest it’s been since 2016.

Given that we always talk about mortgage rates tracking the 10-year Treasury, shouldn’t mortgage rates be looking superb right about now? Well, not exactly. While mortgage rates tend to move in the same direction as the 10-year T-bill, there’s one big reason that mortgage rates lag behind when it comes to rapid rate changes.

When an investor buys a 10-year Treasury bond with a 2% rate, the investor knows that bond will pay 2% interest for exactly 10 years. Period.

When an investor buys a 30-year mortgage security with a 3% rate, the investor knows it will pay 3% for 30 years if and only if the borrower doesn’t sell, refinance, die. Of these, refinancing is the greatest risk when rates are moving lower.

Let’s say an investor buys a mortgage security with a loan balance of $1 million paying 3%. The investor expects to receive payments equal to the loan balance PLUS the interest paid on the loan, so the investor pays $1.04 million for the security – a premium to account for interest.

Now, let’s say rates keep dropping, and the borrower refinances after 12 months. The borrower has paid roughly $30k in interest, but the investor paid a $40k premium. Not a winning investment strategy.

Investors still want to purchase mortgage securities, so what do they do? They reduce the premium they’ll pay. The way this shows up for borrowers is in the interest rate.

In the example above, it takes $40k of premium to make everyone whole in the mortgage transaction. If the investor only offers $30k, the lender needs to make up the extra $10k, and it does that by offering the investor (and, thus, the borrower) a slightly higher interest rate – thus inducing the investor to pay the required premium.

Now, the borrower will see a lower rate than before rates fell because the cost of money is lower, but the borrower’s rate won’t fall as quickly as that of more predictable bonds, such as Treasuries.

If Treasury rates settle into the current range for a while, the refinancing risk will abate, and mortgage rates eventually will catch up.

Rate update: Thank cheap Chinese imports for lower rates

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Aug 052019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

If you needed a recipe for a rate rally, just take a look at recent financial headlines. Friday, the President announced a tariff on an additional $300B worth of Chinese imports, and the investor herd started making flight-to-safety trades, buying up US bonds. When the demand for bonds is high, rates are low (because the bond issuers don’t have to offer as much interest to entice bond purchases).

Almost lost in the stampede was last Wed’s Fed rate cut and the good jobs report on Fri. Without the stampede, I’d hazard that we’d be stuck in the summer doldrums again, wondering when rates would move higher or lower. Fed head Powell hemmed and hawed when asked if the Fed would cut rates again this year, and the jobs report was strong enough to suggest a continuation of moderate economic growth. Neither provided a clear signal to investors.

But investors got their signal Fri and believe it was reinforced by weak global economic data today. On top of that, China devalued it currency overnight to levels not seen since the depths of the Great Recession.

That matters because it suggests a number of rate friendly effects. It suggests the trade war isn’t going to end soon. By devaluing its currency, China hopes to keep its good competitive despite the tariffs. Lower import prices lead to lower inflation, the mortal enemy of interest rates. And it increases the chances of a recession, and that increases the chances the Fed will have to lower short term rates even further.

As usually happens when Treasury rates fall so quickly, only a fraction of the gain has filtered through to mortgage rates. However, if Treasury rates remain in this new, lower range, mortgage rates eventually will catch up.

Rate update: What Fed’s Powell says is important

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Jul 302019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

This is a big week for interest rates. Not only do we have a lot of important economic reports, but the Federal Reserve is expected to announce it’s reducing short term interest rates by a quarter point. The Fed has been telegraphing the rate cut for weeks, so that really shouldn’t garner much attention. Instead, markets are going to be watching what Fed head Powell says in the post-meeting press conference.

Markets WANT the Fed to continue cutting rates at subsequent meetings this year, and the Fed’s forward guidance has indicated a willingness to do so – if economic conditions warrant it. So, I’m sure Powell will get peppered with questions trying to pin him down on that question. If he pulls back on future rate cuts, mortgage rates are likely to jump. Personally, I think he’ll thread the needle, showing a willingness to cut further, but saying the timing depends on economic data.

If that happens, markets will turn their attention to Friday’s jobs report. Last month’s report rebounded strongly from relatively weak May numbers. July’s economic data has been somewhat mixed, but generally positive. Consumer spending has buoyed the economy, making up for a slowdown in the manufacturing sector.

The problem is that the latter is more likely to be affected by slowing economies overseas. Thus, another strong jobs report still might not sway markets (or the Fed) from anticipating lower rates in the months to come, which probably would leave rates in their current range. On the other hand, if job growth shows a weakening trend, I suspect interest rates will follow that trend lower.

Rate update: Will the Fed surprise us?

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Jul 232019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Interest rates have settled back into a narrow range while markets await the Federal Reserve meeting next week. The Fed has strongly telegraphed its intention to cut short term rates, and recent positive economic data has convinced markets it will only be a quarter point cut. So, with that decided, what possible motivation could rates have to move?

Well, I’ll give you a couple, but I think they’re outliers. The first is headlines from the Middle East. So far, the US and its allies seem content mostly to ignore Iran’s provocations, allowing the punishing economic sanctions to continue to work. Should Iran get more desperate and start a shooting war, interest rates will tumble quickly.

The second is the Chinese trade tiff. I’m calling it a tiff because despite the doomsday prognostications from the experts, the damage to the US economy seems to have been quite limited. The Chinese economy, on the other hand, seems to be suffering. Should the Chinese finally decide the pain is too great and strike a deal, it will relieve some of the uncertainty that’s been keeping rates low.

Absent those events, I think it’s a balancing act between weakening foreign economies and the still-strong US economy. And as long as we remain in balance, rates really don’t have any motivation to move.

Rate update: Choppy waters ahead

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Jul 162019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Following the surprisingly strong jobs report at the beginning of the month, mortgage rates have started edging up again – but without conviction. Rates are being affected by several factors right now, and those factors seem fairly balanced.

On the one hand, we have deteriorating economic conditions in Europe and China worrying investors of a global economic slowdown, which would push rates down. The Federal Reserve has acknowledged this ‘fear factor,’ which made markets very happy a couple weeks ago and supported lower rates.

On the other hand, US economic conditions remain healthy, as evidenced by the strong Jun jobs report earlier this month and today’s very strong retail sales report. On top of that, the inflation report last week came in a tad higher than expected, and inflation is the big enemy of low interest rates.

I expect rates to remain choppy and noncommittal until the end of the month when the Fed meets again. Based on Fed head Powell’s Congressional testimony last week, markets fully expect the Fed to cut short term rates by 25 bp at that meeting, so that action probably won’t move the needle. However, if the Fed fails to cut rates or cuts more than expected, watch out. And we’ll talk about those possibilities in the upcoming weeks.

Rate update: Markets expect Fed rate cut

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Jul 032019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The interest rate rally has hit the pause button again, and all eyes appear to be on this Friday’s jobs report.

Rates really started rallying lower after the last jobs report missed expectations so badly. Investors immediately started predicting rate cuts by the Federal Reserve and questioning when the next recession would begin. The Fed acknowledged a potential slowdown at its Jun meeting and didn’t really dissuade the rate cut talk.

The market currently is pricing in a nearly 100% chance of the Fed cutting rates at its end-of-July meeting.

So, what happens if Friday’s jobs report isn’t awful – and what is awful? Well, markets are predicting about 160,000 jobs were created last month, so awful is probably a number below 100,000. Other recent economic data has shown slower growth, but still growth, so it’s quite possible that the Jun number was an outlier – or that it gets revised higher.

I think the Fed has a tricky job this time around. Other economies, in particular the European Union and China, appear to be in the early stages of contraction, and the trade war with China seems to have taken a bite out of the US economy. I suspect the Fed doesn’t want to be seen as caving to the markets, which really want to see a rate cut. However, if other economies slip into recession, and the Fed hasn’t done something to boost confidence, investors may pull back sharply and drag the US into recession, as well.

Should you lock or float? If you’re closing in Jul, and you’re risk averse, today is a good day to lock your rate. Rates are as low as they’ve been in a long time. They could get lower, but probably not much lower until after the Fed meeting. If you like to roll the dice, I think it would take a strong jobs report to send rates much higher. I think the more likely scenario is moderate job growth that leaves rates about where they’ve been for the last month.

Rate update: Rates are heading lower

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Jun 012019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Interest rates have had an impressive rally the last couple weeks as investor sentiment has become decidedly dour. The rally began in earnest when the Chinese blew up the trade deal, but it’s taken on renewed life as talking heads have started tossing around the “R” word again.

Unfortunately for economic growth, now they have something on which to hang their hats. While employment growth and consumer sentiment still appear strong, some economic activity indicators are pulling back.

This may be a manifestation of the trade war, which means it could reverse if negotiators are able to craft a deal soon. However, other economies, particularly those of China and Germany, are slowing even more quickly. We may already be past the point of no return in terms of the next recession overseas.

So, what does this mean for mortgage rates? If you like lower rates, it’s all positive. It’s quite likely we haven’t seen the lowest rates of the year yet.

That said, it may take a while before that happens. It’s long-term Treasury rates, which readily respond to economic conditions, that have fallen so much recently. Mortgage rates are lagging behind for reasons that aren’t likely to change soon.

Even so, investor sentiment is such that traders may ignore a positive economic report, such as next week’s jobs report, and keep rates in their current, lower range, and over time, mortgage rates will catch up.

Rate update: The trade war blues

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May 212019

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates have moved very little this month, and it still seems like their next move is tied to the trade war. The announcement of new tariffs on Chinese goods created a nice little rally that brought rates down close to their lows for the year. But lately, it seems like every negative headline has been met with a conciliatory one, which has kept rates stable.

There is other news out there, and absent the trade headlines, it might move rates. Probably the most significant is the action in the Middle East. A new fighting war would roil markets everywhere and lead to lower rates.

Europe also has current crises of note. Great Britain still has a Brexit problem – deciding how it’s going to leave the European Union. Italy, on the other hand, just thumbed its nose at European Union austerity rules, and pundits once again are talking about the survivability of the EU.

In the US, we’re watching for economic data that indicates something other than a steady as she goes economy. The next big reports aren’t due for a couple weeks, culminating in the May jobs report due on Jun 7th. Analysts aren’t predicting any surprises based on recent economic activity.

And that brings us back to the trade war. Barring something extraordinary happening elsewhere in the world, I think the fate of interest rates depends on the success or failure of trade talks. Resolution would remove the biggest uncertainty for the economy and almost certainly would lead to higher rates.

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