As we await the final vote of the stimulus package and the full details of the Geithner plan, it becomes evident that the fed is going to have a tough time saving the stock market and the bond market, not to mention the dollar. If stocks improve, money usually moves out of bonds. In order to execute elements of the Geithner plan, the US Govt. is going to have to finance all of the stimulus and bailouts by selling bonds (the money has to come from somewhere!!!). When money is moving to stocks and foreigners are dealing with their own issues, the fed will monetize debt - which means the fed will print money and buy back the bonds the treasury just issued.
If it sounds crazy and you feel confused, you are not alone. The Fed is struggling to find solutions to a massive debt bubble.
Printing lots of money to buy our own bonds in order to keep rates low and finance the govt. spending will kill our dollar. So stay tuned for the full details of the Geithner plan and the results of the stimulus vote while we watch to see which market the Fed helps first.
For my readers who think the Fed will try to save the stock market, keep in mind that the bond market is far larger than the stock market and the low rates are needed to keep lending going in all aspects of our economy.
Monday, February 9, 2009
Sunday, February 8, 2009
MANAGING YOUR MONEY
I have added a section below my blog on looking at ways to reduce debt by reviewing fixed items in your budget. When I submit your loan application for review, one of the items being evaluated is your ratio of debt to income. Reducing debt through costs savings will improve your ratio.
Saturday, February 7, 2009
Perspective on Current Rates/Roadmap to the Future
This week was volatile for the stock and bond markets. The treasury market has seen a persistent sell-off in longer term dated treasuries which has resulted in higher mortgage rates.
Mortgage rates do not exist in a vacuum but are affected by multiple factors in the economy.
Financial institutions, investors, mututal funds etc. split their allocation of funds between bonds and equities. As stocks fell in the fall, everyone fled to the perceived safety of all US govt. issued bonds and notes. This so-called flight to safety and liquidity led to some investors buying short-term paper for 0% return: people just wanted to park their funds in a safe place. Also, the federal reserve announced their intention to keep buying long-dated treasuries and forcing yields lower. If you thought you might not get more than 3% return on a bond, you might be tempted to lock in today and take the 3% if you worried that next year, the yield would be 2%.
As stock performance has stabilized, it has encouraged some investors to sell bonds and invest that money in stocks. Several weeks ago, Barron's featured a cover article which warned that bonds were the new bubble just waiting to burst which also encouraged much selling of bonds.
In addition to those 2 factors, the government has outlined numerous stimulus plans which will have to be financed by issuing more bonds. This supply of bonds will be overwhelming and difficult to unload at current rates. The bond market can only be controlled so far and then market mechanisms take over. The huge supply of bonds expected at such low rates suddenly makes corporate bonds and stocks look better on a risk reward basis. The flight out of bonds has started. On a short-term basis, bond yields may improve and we may see better rates.
The federal reserve has an enormous task ahead in trying to bring rates back down and will not be able to overcome normal market forces forever.
I try to advise all clients on the best time to lock in a good rate but can't always pick the exact bottom. Mortgage rates change several times a day and constantly fluctuate just as stocks fluctuate. Due to volatile conditions we are experiencing in our economy, I try to view rates from a longterm perspective and a risk/reward perspective. On a historical basis, rates are near lows not seen for decades and very reasonable. Viewing risk/reward, I see that rates might improve to 4.5% if the economy worsens, but I see a greater risk of the bond market bubble popping within the next 8-18 months. I believe we could see rates as high as 7% in a short time if all of the stimulus packages lead to inflation. Therefore, I advise clients to take the best rate for their needs and not wait for the last fraction improvement.
With the treasury announcing plans for handling toxic assets and congress passing the stimulus bill, expect a volatile week for the stock market and mortgage rates.
For the short-term, look for rates to improve and stay within a narrow trading range as the stock market tries to rally. When this rally fails, I look for rates to improve as the bond market has a final rally. No one, including, me can give you exact dates. I can only provide a guide to these events which may also be affected as the "next best bailout package is proposed".
How and when you choose to make a purchase or refinance will depend on your individual needs.
Mortgage rates do not exist in a vacuum but are affected by multiple factors in the economy.
Financial institutions, investors, mututal funds etc. split their allocation of funds between bonds and equities. As stocks fell in the fall, everyone fled to the perceived safety of all US govt. issued bonds and notes. This so-called flight to safety and liquidity led to some investors buying short-term paper for 0% return: people just wanted to park their funds in a safe place. Also, the federal reserve announced their intention to keep buying long-dated treasuries and forcing yields lower. If you thought you might not get more than 3% return on a bond, you might be tempted to lock in today and take the 3% if you worried that next year, the yield would be 2%.
As stock performance has stabilized, it has encouraged some investors to sell bonds and invest that money in stocks. Several weeks ago, Barron's featured a cover article which warned that bonds were the new bubble just waiting to burst which also encouraged much selling of bonds.
In addition to those 2 factors, the government has outlined numerous stimulus plans which will have to be financed by issuing more bonds. This supply of bonds will be overwhelming and difficult to unload at current rates. The bond market can only be controlled so far and then market mechanisms take over. The huge supply of bonds expected at such low rates suddenly makes corporate bonds and stocks look better on a risk reward basis. The flight out of bonds has started. On a short-term basis, bond yields may improve and we may see better rates.
The federal reserve has an enormous task ahead in trying to bring rates back down and will not be able to overcome normal market forces forever.
I try to advise all clients on the best time to lock in a good rate but can't always pick the exact bottom. Mortgage rates change several times a day and constantly fluctuate just as stocks fluctuate. Due to volatile conditions we are experiencing in our economy, I try to view rates from a longterm perspective and a risk/reward perspective. On a historical basis, rates are near lows not seen for decades and very reasonable. Viewing risk/reward, I see that rates might improve to 4.5% if the economy worsens, but I see a greater risk of the bond market bubble popping within the next 8-18 months. I believe we could see rates as high as 7% in a short time if all of the stimulus packages lead to inflation. Therefore, I advise clients to take the best rate for their needs and not wait for the last fraction improvement.
With the treasury announcing plans for handling toxic assets and congress passing the stimulus bill, expect a volatile week for the stock market and mortgage rates.
For the short-term, look for rates to improve and stay within a narrow trading range as the stock market tries to rally. When this rally fails, I look for rates to improve as the bond market has a final rally. No one, including, me can give you exact dates. I can only provide a guide to these events which may also be affected as the "next best bailout package is proposed".
How and when you choose to make a purchase or refinance will depend on your individual needs.
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