First the facts, then the ponderables. Long-term U.S. interest rates fell again today, now to a 20-month low. The 10-year T-note broke through the 1.7 percent prior low to 1.66 percent, down from 1.85 percent on Monday and from 2.3 percent in Christmas week.
Meanwhile, on Wednesday the Fed affirmed its intention to “liftoff” from 0 percent.
Mortgages are a slightly different story. Thirty-year fixed-rate, low-fee loans are in the 3.75 percent area, depending on borrower characteristics, the spread widening to the 10-year T-note.
A normal spread is about 1.8 percent. The 2 percent today signifies three things:
- An international flight to quality focuses on Treasurys, not MBS.
- The new refi wave chokes the market.
- Mortgages are approaching absolute zero. A retail rate includes incompressible costs of origination, securitizing, servicing, and compensation for prepayment/extension risk, and a credit spread over Treasurys.
This latest drop is the result of today’s estimate of fourth-quarter GDP, a 2.6 percent gain versus expectations of 3.2 percent. Optimists are hooting happily at the consumption component, up 4.3 percent. These Pollyannas are unimpressed by being outvoted by global capital markets, which obviously gave more weight to weakness in inflation (the personal consumption expenditures deflator to 1.1 percent from 1.4 percent in Q3), early-stage damage from a hyper-dollar (imports up, exports down), and business investment only 1.9 percent annualized.
Another datum pushing down on rates: Orders for durable goods began to tank in late fall. A notoriously volatile series, but two straight months, and stripping out super-volatile transportation: November’s initial -0.4 percent was revised to -1.3 percent, and December’s expected 0.8 percent improvement arrived instead at -0.8 percent.
Another downward force: the now-fantastic currency war underway, essentially every developed nation desperately trying to maintain competitive position versus the euro and yen, both falling fast via intentional debasement by their central banks. This week the German 10-year yield fell to 0.269 percent, crossing below the previously ultra-low Japanese 10s, now 0.282 percent.
The exception to the currency war is China, still holding its dollar peg, but at the price of internal slowdown, and not sustainable. Add Singapore to the list of strong, fiscally sound economies forced to drop central-bank rates to prevent their currencies from rising too far above the yen and euro, Switzerland and Denmark now below zero. Everyone but China is now in forceful devaluation versus the dollar.
Geopolitical risk is in play, but hard to separate from other currency events. Europe at cost to its own economy will expand sanction punishment of Russia, which seems to have cornered Czar Vladimir into a nothing-to-lose assault in Ukraine. Greece is a wild card, its new government the extremists typical of too much privation for too long: They want to keep good German money in their pockets but refuse to take the economic actions to justify the privilege.
Phew. Quite the run-down. I am a Fed-fan, one of the faithful. I know that they see all of this, especially foreign funds pouring into U.S. bonds and distorting economic signals from that market. But they seem captured by old rules in old models, especially their sensitivity to job gains — gains in lousy jobs that seem taken by throw-in-the-towel workers, nothing resembling “overheating.”
James Bullard, St. Louis Fed president, is on the tape today. He competes with two other Fed regionals for the title of Dimmest Bulb, but may have repeated emphasis heard from leaders. “A tricky call … how are we going to react to mitigate the risk of bubbles? The only candidate is bonds, government debt and other kinds of debt.” There we have it: Bonds may signal imminent slowdown, but we should pull the plug on them, force rates up even though exactly backwards.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
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