The Week Ahead in the Capital Markets
February 25, 2008 May you live in interesting times, goes the famous curse. Thirty-year mortgage rates have surged nearly 1.00% higher since setting mid-January lows; the sharp increase in rates was five standard deviations greater than the average monthly mortgage rate move. Statistically speaking, a five standard deviation event is supposed to occur roughly 0.0001% of the time. Interesting times, indeed.
| Market | Close | Week Change |
|---|
| 30-Yr Mortgage | 6.12% | +0.21% | | 10-Yr Treasury | 3.81% | +0.04% | | 2-Yr Treasury | 2.01% | +0.10% | | Fed Funds | 3.00% | -0.00% | | Fed (+6 months) | 2.51% | +0.04% | | Dow Industrials | 12,381
| +33 |
The spread between mortgage and Treasury yields continues to astound. 30-year mortgages finished the week nearly 3.00% higher than equivalent Treasuries. To put that number in perspective, consider that the spread reached a mere 2.30% when the Fed was battling recession in the early Nineties and again when Long-Term Capital imploded in the late Nineties. The spread hit 2.80% earlier this decade when Greenspan raised deflation fears and was driving short-term rates to 1.00%. Today s spread of 3.00% is truly historic, and is well above the long-term average of 1.50%. Watch closely, because when short-term rate volatility subsides, mortgage rates are likely to compress quickly towards Treasury yields.
Inflation fears continue to roil the markets. Core CPI prices were higher than expected in January, which put the market on the lookout for inflation pressures outside of the energy and food complexes. Fed-funds futures reversed course somewhat, and expectations for dramatic Fed rate cuts lessened. A 0.25% cut (to 2.75%) is widely expected in March, but futures no longer predict funds below 2.00% for later this year. Also reversing recent trends, the yield curve flattened as short-term yields rose more than long-term yields. The spread between ten-year and two-year Treasuries finished the week slightly lower at 1.78%.
| Indicator | Due | Consensus | Previous |
|---|
| Durable Goods Orders | Wed | -3.5% | +5.2% | | GDP (4Q Prelim) | Thu | +0.7% | +0.6% | | Producer Price Index | Tue | +0.3% | -0.1% | | Existing Home Sales | Mon | -1.0% | -2.2% | | Consumer Price Index | Wed | +0.3% | +0.3% | | New Home Sales | Wed | -0.7% | -4.7% |
Jumbo fixed-rate prices continue to muddle along, about 2 ½ points behind conforming prices. Pricing for the new, temporary agency jumbo loans is not yet known. In related news, Fannie Mae and Freddie Mac will announce earnings on Wednesday and Thursday respectively.
"I mean, think about it, John McCain with a young blond. And this was interesting: out of force of habit, Hillary is standing by him." David Letterman
Thanks for your business and have a good week.
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