Rate Outlook: Fall 2011
Rate Outlook: Fall 2011
By Gary Umholtz, Branch Manager, RPM MORTGAGE
One year after record rate lows were set October 2010, rates have tested new lows again in re.cent weeks The downtrend began July 25 with awful Q2 (and Q1 revised) GDP, then a mediocre-at-best July jobs report, then S&P’s U.S. downgrade. It continues as Europe’s debt crisis escalates, and the U.S. Fed provides more rate stimulus. Below are specifics on this rate downtrend, plus the Fall 2011 rate outlook.
RECORD LOW FOR 10YR NOTE
The 10yr Note yield, a key benchmark for long rates in the economy, closed below 2% for the first time ever on September 2. A yield is a rate, and rates drop when bond prices rise on buying rallies. The 10yr Note and mortgage bonds have rallied as safe haven investments during questionable economic recovery. The 10yr hit record levels after the September 2 jobs report showed zero August jobs created. Mortgage bonds also rallied, which is why rates fell again. Markets interpret weak jobs data to mean low company confidence now and even lower consumer confidence going forward.
WEAK U.S. ECONOMY
Consumer confidence and spending were picking up but got a lot worse after the debt ceiling circus in July. In September, consumers’ future optimism was the worst since 1980. And while we got a decent August Institute for Supply Management (ISM) manufacturing report—a national reading— two important regional manufacturing reports show a four-month weakening trend. The last two months of home price data (from the S&P Case Shiller report) showed signs of stabilizing, but not enough to reassure markets because new and existing home sales are still weak. This data has culminated in anemic 0.4% and 1% GDP growth for the first two quarters respectively, and continues to drive double-dip recession fears. This pushes investors into mortgage bonds and Treasuries, which lowers rates.
U.S. FED STRATEGY
The Fed’s response to all of this was to announce two rate stimulus strategies on September 21.
EUROPE’S DEBT CRISIS
Eurozone nations are buckling under big debt loads, and this has also contributed to lower U.S. rates as global investors seek the safety of mortgage bonds and Treasuries. Debt defaults by Eurozone countries like Greece seem imminent, and it’s hard for these different governments to arrive at consensus because their cultures are so different. That prolongs Europe’s crisis, and while the net result is lower U.S. rates, our rates still swing up and down wildly each day and week as investors decide whether to keep or sell U.S. mortgage bonds based on the latest developments in Europe.
HOW LOW CAN RATES GO?
Economic data or fundamentals is one factor that drives trading in mortgages and Treasuries. Trading patterns or technical’s are another. Weak fundamentals support current high levels for mortgages and long-dated Treasuries, but technical’s have been capping runs too much higher from current levels. Traders tend to back off when bond prices get too high. And when they sell, it pushes bond prices down and rates up. We don’t see mass selling because the fundamentals still warrant high mortgage bond prices (and low rates), but technical price caps make drastic new rate lows less probable.
FALL 2011 RATE OUTLOOK
Given these fundamental and technical factors, we’ll likely be in a trading range until December, with rates +/- .25% from current record low levels until markets can get a clear signal from the Fed and forthcoming data from the U.S. and Europe. If you’d like to discuss specific rates, home prices, or anything else, I’m at your service.
Gary Umholtz with RPM Mortgage can be reached at (707) 343-9510 or firstname.lastname@example.org for a no obligation consultation.