Posts Tagged ‘bonds’

Rates holding at historic lows

June 8, 2010

Interest rates are high, aren’t they? The experts predicted higher rates by mid year, and I even mentioned that would happen here, here, here, here, here, and here (if not more). If you read those posts, you will see there were several reasons why I (and essentially everyone else) thought this would happen. These reasons primarily revolved around the Federal Reserve ending their buying mortgage backed security (MBS) bonds.

* – definitely read the first linked post to get some more background information on that program from the Federal Reserve

SO… why are interest rates at their lowest point of 2010? Why did rates not dramatically rise when the Federal Reserve ended their program of buying  bonds?

Thanks to the debacle in Europe (along with our own economy that isn’t back on its feet), investors in the US and around the world are back to buying our debt (bonds) and not those of Europe. It was the heavy investing in Europe and the Euro that caused the precipitous drop in the value of the Dollar, which motivated the Federal Reserve to begin buying MBS bonds in late 2008 and increase their value.

Why is this important? – As the value of MBS bonds rise, interest rates fall. This cause and effect pattern, heavily influenced by the Federal Reserve over the past 18 months, led us to these historically low interest rates. When the program ended this past March, everyone assumed rates would rise. Well, they obviously didn’t and there were plenty of other investors more than willing to step in and buy bonds to keep rates low!

Now for the question we would ALL love to have answered, “What’s next for rates?”

In the past when interest rates got to these low levels, they almost immediately went back up. This seemed to be the self-imposed floor. Today? Not only have rates held, but they have slightly improved. They might actually get lower this time because:

  • The US economy is definitely not back on its feet and private sector hiring is down
  • The problems in Europe are just getting started as Hungary’s credit rating was down graded and Portugal, Spain, & Italy all share similar problems
  • Analysts are mixed whether or not the bailout for Greece will actually work

Regardless of what interest rates do (and it is anyone’s guess at this point), now is the time to speak with someone to get prequalified to buy a home OR to review your current mortgage to refinance. By doing so, you would be in a prime position to take advantage of interest rates at their current levels OR ready to move at a moments notice if rates continued to fall.

If that is you, I would enjoy the chance to speak with you and get everything in order for your new mortgage.

The recession is over… right?

November 4, 2009

The numbers are out. The last quarter saw the GDP grow by 3.5%.  That means the recession is over and it’s time to party!!

Or is it?…

GDP growth is a great way to measure the state of the economy, but unusual circumstances (such as the $600 government rebate check in Q2 2008 or “cash or clunkers” in Q3 2009) can mask actual deficiencies. Moving forward, there are some other areas that one would like to see some improvement.

  • Jobs – While job creation typically lags behind an economic recovry, seeing fewer jobs being shed month-to-month would encouraging – September had more overall jobs lost than August.
  • Home values and sales – The housing market is slowly stabilizing and home sales are increasing month-to-month, but we are not there yet.  When people feel confident in their job, they are more likely to make bigger purchases (homes, cars, etc.).  Until the job market rebounds, the housing market will continue to struggle.
  • Inflation – This has definitely not been problem during the current recession. Inflation figures are below 0% and have NOT given way to major deflation.  Ironically, mild inflation can be viewed as a good thing for the economy. It shows that people are spending/investing money.  When year-over-year inflation figures are below 0%, it means people are not spending/investing money. That is not the best scenario for an economy primarily based on…
  • Consumer Spending – Whether you like it or not, consumer spending comprises 60-70% of the U.S. economy.  There was a 3.4% growth in consumer spending in the last quarter, but some of the growth is attributed to the “cash for clunkers” program. It will be telling to see how consumers behave as we move into the holiday spending season.
  • Stocks – Wall Street has roared back after falling to decade lows in the market.  Even though the market is still volatile, the recovery in stocks has been a much needed boost.

Is the recession over?  While there have been great strides made, in the words of Obama and others… “we’re not out of the wood yet.”  These other areas need to see improvement too if we truly want to see an end to the longest and deepest recession since the Great Depression.

footer_clayjeffreys2