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(COMTEX B: Mortgage market commentary--Low rates
require persistent panic
Nov 22, 2002 (Inman News Features via COMTEX) -- The tone of financial markets shifted suddenly this week, favoring stocks and hurting bonds and mortgages. By yesterday, 30-year fixed rates touched 6.25 percent in the lowest-fee offerings, the high for rates in the last three months. There was nothing in new economic data to cause such an abrupt change in psychology. A modest drop in new unemployment claims and some life-like twitches in technology were not enough, though there is a growing sense that the November economy has been no worse than flat, and not an extension of the September-October decline. For rates to stay low, panic must persist; instead, yields on ultra-safe Treasuries and mortgages rose, while rates for corporate bonds stayed the same or fell. Narrowing "credit spreads" invariably reflects fading fear. Federal Reserve Board Chairman Allen Greenspan dropped a policy hint in an accidental way on Tuesday, and the big change in market psychology followed. This Fed Chairman doesn't drop lint by accident. Fed Chairmen avoid making major policy pronouncements in high-tension settings; instead they leak them, or slip them in some otherwise ho-hum remarks. Tuesday's numbing venue: six droning pages on international financial risk delivered to the Council on Foreign Relations. The text is on the Fed's Web site; read it and you can all but hear the audience struggle for wakefulness, punctuated by the plopping of faces into soup plates. In asides from the published text of the speech, the Chairman gave stark descriptions of the economy: "...a very major fallback in business investment.... Nobody is doing anything, or I should say, most everybody is doing nothing." Then, also aside from text, came an astonishing statement of possible Fed action. The Chairman: "We would just move out on the curve, as we have in the past. We are very far from the Fed being restricted." Moving "out on the curve" is a phrase beyond the mainstream media, hence a remark unreported and unnoticed except among professionals. It refers to the "yield curve," the graphic description of interest rates prevailing at different maturities. The Fed-controlled rate watched by everyone in the modern era is the Fed funds rate, the overnight cost of money. Until Tuesday, the markets had assumed that the Fed's half-point rate cut two weeks ago to 1.25 percent marked the near-end of the Fed's assistance to the economy; that the Fed had shot its bolt, we were on our own and the Fed is nearly as helpless as the Bank of Japan. To "move out on the curve" means that if the Fed runs out of above-zero Fed funds room, it would begin to buy longer-dated instruments -- bonds -- and drive down the whole rate structure as necessary to revive the economy. Greenspan's "as we have in the past" referred to a policy in mothballs for half a century. >From 1942 to 1951, the Fed held the yield on long Treasury bonds to 2.5 percent or less, buying bonds whenever yields threatened to rise higher. In the modern era, it has been axiomatic that the Fed does not manipulate long-term interest rates. No modern Chairman has suggested that the Fed even try to do so. At best, the Fed has worked to keep long-term rates low by keeping inflation low. This policy announcement is a big deal. In the near term, it leads to a perverse effect in the bond market-the Fed as a potential buyer of bonds should help rates, but hurts instead. The logic: if the Fed has the power to rescue the economy and intends to do so, then traders and investors shouldn't buy mortgages and bonds, and maybe should sell the ones they have and buy some stock. Will the Fed need to move "out on the curve"? Watch U.S. automakers, stock markets, holiday sales and the visibly sinking economies in Japan and now, Europe. Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colorado. He can be reached at [EMAIL PROTECTED]. Send a Letter to the Editor for publication. Send a comment or news tip to our newsroom. Please include the headline of the story. By Lou Barnes Inman News Features Copyright 2002 Lou Barnes Distributed by Inman News Features -0- INDUSTRY KEYWORD: Consumer *** end of story *** |
