Saturday, June 11, 2011

30-Year Mortgage Rates Fall to 6-Month Low, +15-Year Corporate Yields Close to Historic Lows

In another market-based indicator that inflationary pressures are contained for the time being and should not be a major concern, the fixed rate for 30-year mortgages fell to the lowest level in 2011: 4.55%.  That's the lowest level since early December last year, six months ago, and only 38 basis points above the historical low level of 4.17% last November. It just doesn't seem like there could be any major inflationary pressures in the U.S. economy when 30-year fixed rates are so, so low.

Update: It's not just long-term mortgage rates that are falling and close to historical lows, the graph below of 15+ year yields for U.S. corporate bonds shows a similar pattern. And I don't think the Fed is buying these corporate bonds, and Fannie and Freddie are not backing them or buying them, so I don't think we can claim government manipulation of markets here?


At 6/11/2011 10:47 AM, Blogger morganovich said...

with the fed buying 80% of the bond market and freddy and fannie buying a like amount of the mortgage market, this does not seem like a terribly meaningful indicator.

it shows governmental manipulation of markets, not inflationary expectations.

At 6/11/2011 11:03 AM, Blogger Buddy R Pacifico said...

I've got to go with morganovich on this.

At 6/11/2011 11:17 AM, Blogger cluemeister said...


Mark, I'd be curious to know what a bank would charge for a 30 year fixed note with no federal backing right now.

At 6/11/2011 11:35 AM, Blogger morganovich said...


well, wait until mid july once qe2 ends and then take a look at the rates for supuerjumbos that the GSE's won't buy.

that should give you some sense.

though you'll need to adjust for down payment requirements. many banks are looking for 30% down now.

you'll also need to adjust for credit quality.

current mortgage rates are like a drink special in the VIP room.

if you have 840 credit, you can have one, but show up with even one blemish, and you're going to pay MUCH more if they will lend to you at all.

everyone i know in real estate right now says that credit contingencies are breaking most of their deals as banks will not fund loans.

i got my house (in november) for over 300k less than another bid because i made a cash offer and the seller had already had 2 offers fall out of contract due to an inability of the buyer to get a loan.

At 6/11/2011 12:35 PM, Blogger geoih said...

The market is full of just printed money looking for some sort of yield, any sort of yield. If nobody is buying houses, then you do whatever you can to get them to sell, to get people to borrow. So you drop the rates.

It's a supply and demand response to too much money. I wonder where all that money came from?

At 6/11/2011 12:46 PM, Blogger Rufus II said...

Different Day - Same Answer

Recession coming.

At 6/11/2011 1:00 PM, Blogger morganovich said...

"then you do whatever you can to get them to sell, to get people to borrow. So you drop the rates.

It's a supply and demand response to too much money."

i think you have the causality a bit wrong here.

lenders do not think in terms of rates when they lend, they think in terms of spread and resale.

it's a cost of capital issue. if you can lend at 4.5 and short a govvie at 2.9, you lock in spread.

alternately, if you can lend at 4.5 and then sell the loan to freddie a week later at 4, well, that's a 50bp riskless yield that ties up no capital.

so long as freddy and fannie are willing to buy the while market (and they are 75%-80 of it right now) you're not going to disrupt that.

but we are piling massive risk onto federally guaranteed balance sheets. this is a great riskless deal for the banks, but the taxpayers are getting set up for some tough sledding.

At 6/11/2011 1:41 PM, Blogger juandos said...

"with the fed buying 80% of the bond market and freddy and fannie buying a like amount of the mortgage market, this does not seem like a terribly meaningful indicator"...

Shouldn't it read "with the taxpayers buying 80%..."?

Speaking of Fannie & Freddy there a book coming out titled Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon written by Gretchen Morgenson and Joshua Rosner...

At 6/11/2011 2:07 PM, Blogger PeakTrader said...

Markets continue to prove the BLS correct and ignorant sites like ShadowStats incorrect.

At 6/11/2011 3:31 PM, Blogger Benjamin Cole said...

The Fed is not buying corporate bonds.

Yields are low, and will go lower, likely.

There is a global glut of capital, and inflation in the USA is dead.

At 6/11/2011 3:49 PM, Blogger juandos said...

"Markets continue to prove the BLS correct and ignorant sites like ShadowStats incorrect"...

I don't know about that PT though I'm 'not' defending ShadowStats but the BLS has been putting out some questionable data on occassion as I've linked to in the recent past...

At 6/11/2011 6:26 PM, Blogger PeakTrader said...

Juandos, your link uses a simple and inferior method (including assuming "seasonally unadjusted numbers" are "solid") and doesn't even compare it to the BLS method.

So, if there's a fault in the BLS method, how can it be identified? It's more likely there are faults in your link's method (including the assumption that a ratio doesn't change over time, regardless of any changes, over time).

At 6/11/2011 6:45 PM, Blogger PeakTrader said...

Anyway, if markets didn't trust BLS data, they wouldn't react (or anticipate) to reflect the data. Also, the Fed couldn't make appropriate policy adjustments.

At 6/11/2011 7:05 PM, Blogger PeakTrader said...

Early 1980s recession

"By 1979, inflation reached a startling 11.3% and in 1980 soared to 13.5%...The federal funds rate, which was about 11% in 1979, rose to 20% by June 1981...The prime interest rate, a highly important economic measure, eventually reached 21.5% in June 1982."

At 6/11/2011 7:37 PM, Blogger PeakTrader said...

This comment has been removed by the author.

At 6/11/2011 8:05 PM, Blogger Craig Howard said...

Shouldn't it read "with the taxpayers buying 80%..."?

No. Anyone who uses dollars pays for the Fed's little bond-buying spree. It isn't coming from tax dollars, it's a result of money-creation. Everyone's dollars have a bit less purchasing power as a result.

It's the real "flat tax".

At 6/11/2011 8:46 PM, Blogger Rufus II said...

Yeah, and by '80 we'd inflated away a lot of our debt, and we were just a li'l ol' double-dip away from "ready to go."

Inflation can be your bestest bud.

Or, you can become Zimbabwe.

You pays your money; you takes your chances.

At 6/11/2011 8:47 PM, Blogger Rufus II said...

I know that worried look on the Bernanke's face isn't from thinking about "inflation."

At 6/11/2011 8:53 PM, Blogger Rufus II said...

What is murderizing us, right now, is we can't get any. Any wage inflation. (The Rolling Stones are rolling through my head.) :)

Bernanke would kill for some wage inflation right now. But, how do you get wage inflation when close to twenty percent of your workers are unemployed/underemployed? Beg China to give their workers a raise? All the way up to $2.50/hr?

At 6/11/2011 8:56 PM, Blogger Rufus II said...

What everyone forgets about the seventies is, we were all making money. There was a lot of demand. Real Growth was in the 3% range, even with the crazy inflation.

At 6/11/2011 9:00 PM, Blogger Rufus II said...

If Carter doesn't screw up the hostage rescue he would have probably been reelected.

At 6/11/2011 9:27 PM, Blogger PeakTrader said...

Rufus, in the '70s, between recessions, the unemployment rate wasn't high. We had an inefficient, but employed, workforce producing output, e.g. because of unions.

Also, I suspect, quality improvements slowed or even declined (e.g. quality of autos).

Moreover, the U.S. generally didn't have trade deficits (which have a negative effect on real GDP).

In the '70s, demand exceeded supply. It has been the opposite recently.

At 6/11/2011 9:49 PM, Blogger Rufus II said...

It's all been downhill since the '62 Chevy 409.

At 6/11/2011 9:50 PM, Blogger Rufus II said...

Especially when the tank was full of $0.25/gal Ethyl.

At 6/11/2011 9:56 PM, Blogger Rufus II said...

Of course, that was before we decided the government should pay for the illegal aliens to build Everyone a poorly-constructed house they couldn't pay for,

and that everything else should be built by Chinese slave labor.

At 6/11/2011 10:00 PM, Blogger Rufus II said...

It was brilliant, really. Move the Shoe Factory to China, and Bubba can go to work as a Brain Surgeon, or a Software Engineer.

Can't believe it took our politicians so long to think of it.

At 6/12/2011 1:51 AM, Blogger PeakTrader said...

Rufus, newer homes are better quality. That's one reason why home prices went up.

At 6/12/2011 2:01 AM, Blogger PeakTrader said...

By Bob Petersen
Precision Inspection

How many times have you heard ‘they don’t build ‘em like they used to’? Why do people say this? Is it true? Absolutely NOT!

Besides a FEW things that were better with older homes (no ‘finger jointed’ studs or trim, better quality wood, no hollow doors or ‘pressboard’, better doorknobs and no computer controlled appliances), modern homes are much better in many ways. Here’s a partial list:

Roofing/Insulation: Before 1982 lasted maybe 15 years. Now roofs last a minimum of 20 and some are hail resistant. Older homes had little or no insulation; newer homes have lots of it & much better attic ventilation.

Foundations: Pier and beam or early slabs have lots of problems. Modern slabs have NO problems if properly constructed.

Wiring: Before 1961 homes had ungrounded outlets (with cloth insulation before 1950!). Before 1978 there were no GFI outlets or smoke & CO detectors. Older homes had fewer circuits and fewer outlets per room; or even worse, aluminum wiring.

Plumbing: Homes built in the 1950s and earlier had steel waterlines prone to corrosion and internal scaling.(who thought of running water through steel pipes? That was dumb). The tub and sink fixtures had rubber washers which wore out & needed replacing. Newer homes have washerless fixtures. Older homes have cast iron (or felt paper!) sewer lines which crack, scale up, fall apart and corrode. Homes since the 1970s have pvc which is virtually indestructible. Drainlines are larger in diameter too. Water heater relief valves and flues are much better now than in the 1960s, which makes homes a lot safer. Septic systems are cheaper, smaller and better for the land + have no drain field to replace!

HVAC: Few homes even had central A/C till the 1960s. Remember window units and space heaters? They were awful. Newer A/C and Heating is very efficient, quiet and MUCH safer. The freon used now is better for the environment too…

Appliances: Homes before the 1960s rarely had a dishwasher or disposal and certainly no microwave (how did we exist without those?). Cooktops and ovens had pilot lights which stunk up the kitchen with gas fumes when they went out. Modern dishwashers are very quiet compared to older ones. Older homes often had vent-hoods which blew into the attic! (fire hazard anyone?). I do however prefer the old appliances for one reason, they didn’t have computer controls which are very expensive to repair compared to the older electromechanical controls of yesteryear. Countertop technology has progressed light years since the 1980s!

Building Codes: Are constantly changing for the better which make homes safer and more energy efficient. There were NO codes prior to the late 1940s and fire safety concerns didn’t even exist. Energy efficiency concerns didn’t exist prior to the 1980s. HVAC, insulation, attic ventilation, windows and solar screen technology are light years ahead of even 20 years ago not to mention toilets and appliances which use a lot less water. Homes are much better sealed than they used to be.

YOU can have the ‘good ole days’ if you want ‘em, I like 2007 !

At 6/12/2011 1:24 PM, Blogger morganovich said...

"Shouldn't it read "with the taxpayers buying 80%..."?"

not exactly.

the fed is neither accountable to taxpayers nor can it bill them. it just prints money.

this drives inflation which is a particularly insidious defacto tax on savings, but so long as they own printing presses, they can never "run out" of money, they can just destroy its value.

At 6/12/2011 1:29 PM, Blogger morganovich said...

"Markets continue to prove the BLS correct and ignorant sites like ShadowStats incorrect."

and just what markets are those?

the mortgage and bond markets are controlled by government agencies and are giving nothing resembling a legitimate price signal.

the jobs market proves you wrong. it's the one thing they cannot fake (despite outlandish attempts to define the unemployed out of existence)

if the BLS is right, then why has job creation uncoupled from its historical relationship to reported real growth since 1992?

and inevitably, benji pipes up again about corporate bonds.

those yields are set off of government bonds. it's a tiny market and they get bid up by bond funds looking for incremental yeild.

this has been explained to you repeatedly. your repetitive willful ignorance gets tiresome.

At 6/12/2011 1:31 PM, Blogger morganovich said...

"Moreover, the U.S. generally didn't have trade deficits (which have a negative effect on real GDP). "

historically, periods of high real growth have correlated with larger trade deficits.

"trade deficit" is a meaningless idea.

trading money for something you value more does not leave you worse off no matter who you buy it from.

At 6/12/2011 1:33 PM, Blogger morganovich said...

"It's the real "flat tax"."

perhaps, but on savings, not income.

At 6/12/2011 4:52 PM, Blogger PeakTrader said...

Morganovich, the real interest rate is the nominal, or stated, rate minus the rate of inflation.

If your assumption inflation is really something like 8%, then large and liquid markets are wrong, because nominal rates continue to be at the lowest levels since the 1950s.

The jobs market also supports low inflation, e.g. the Phillips Curve.

Productivity, which is disinflationary, shifted to a higher level beginning in 1995.

There was less international trade before 1980, because the U.S. was generally a closed economy.

In the 2000s, real growth was low, because trade deficits were high. Y = C + I + G + NX. The more negative NX becomes, the more negative Y becomes, ceteris paribus.

At 6/12/2011 5:33 PM, Blogger morganovich said...

"then large and liquid markets are wrong, because nominal rates continue to be at the lowest levels since the 1950s."

gee, you mean like the US bond market that the fed is buying 80% of?

these are not currently free markets. their prices are being set by the government.

"Productivity, which is disinflationary, shifted to a higher level beginning in 1995."

and this is completely backwards. productivity is a derived number. you cannot calculate it in an economy without knowing inflation.

not that the inflation calculation was changed in 1992.

your "productivity miracle" is just understated inflation.

no one argue that the new CPI reads lower than the old one. it was designed to.

in any given state of the real world, that will result in higher calculated productivity.

can you seriously believe that it is just a coincidence that productivity gains took off at the same time inflation calculations were altered to read lower?

this whole "productivity miracle" is a statistical farce.

At 6/12/2011 5:48 PM, Blogger morganovich said...

regarding the XY component of GDP, it's just an arbitrary figure not necessarily related to utility, well being, or wealth.

if you give me 1000 units and i give you 200, i have an 800 unit deficit, but if units create utility, then i am far the happier.

and again, look at it yourself:

high US "trade deficits" correlate with high real GDP growth very, very tightly.

our trade deficit soared through the 90's during high growth.

it sank for a year in the 2001 recession.

it rose hugely again in the recovery, then, in 2006, both it and our growth faltered.

the recession cut it massively in 2008-9, and it rose again with recovery.

i'm not claiming causality, but this correlation sure makes the claim that trade deficits harm real growth look pretty suspect.

i understand the formula, but clearly there's more to it than that.

At 6/12/2011 6:01 PM, Blogger PeakTrader said...

Morganovich, interest rates are determined by markets, e.g. investors and lenders. If they believed inflation was really 8%, they'd demand more than 8%.

Also, if inflation was 8%, why is the Fed Funds Rate zero? Why isn't there a wage-price spiral? Why is actual output well below potential output. Why is the country well short of full employment?

How can you have inflation when output is way below capacity?

If Americans expect prices to rise, why aren't they spending? (conversely, when people expect prices to fall, they'll save).

The quantity and quality of output per unit of input is measurable. That's what really determines productivity.

Inflation was overstated before 1992, and after appropriate adjustments to reflect the dynamic economy, became less overstated after 1992.

After 1980, U.S. demographics improved, the economy became more open, the Information Revolution mushroomed, etc.

At 6/12/2011 6:11 PM, Blogger PeakTrader said...

Morganovich, all else equal, trade surpluses add to GDP and trade deficits subtract from GDP.

However, you're comparing expansions with recessions, which aren't equal.

In a recession, U.S. trade deficits shrink, which add to GDP, i.e. makes GDP less negative.

At 6/12/2011 6:39 PM, Blogger PeakTrader said...

If you want to see a "house of cards," see the gold market.

Unlike the Nasdaq bubble or the housing bubble, where there was some real value, there's nothing holding-up gold, except conventional wisdom.

If gold vaults over $2,000, e.g. around 2015, it'll be time to short the hell out of it.

At 6/14/2011 10:40 AM, Blogger juandos said...

Speaking of gold PT check this out from Zer0Hedge: Priced In Gold, The Median Home Price Is Down 80% In The Past Decade

(there is also a graph to look at)


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