Weak Japanese Economy Sparks Flight to Safety; China Now #2 – Daily Mortgage Rate Upate for August 17th, 2010
Growth in Japan tepid; China overtakes it as 2nd largest economy; Fed operations today in focus; Fate of Fannie and Freddie on the table – Daily Mortgage Rate Update for August 17th, 2010
The 10-year Treasury yield hit its lowest point in over a year yesterday, as traders sought the safety of US government-backed debt in the face of continuing data that the world’s economy is losing steam. On Sunday, Japan announced its lowest quarterly GDP growth rate, 0.1%, since the generally-agreed economic recovery started last year. This caused the Japanese economy to lose ground; For much of the 2nd half of the 20th century, Japan had been the world’s 2nd largest economy behind the US, but it has now lost that spot to China.
In yesterday’s trading, activity in stocks and most bonds was very muted, but traders bought US Treasury securities vigorously, pushing yields down by over .1%. When there is such an imbalance, or disconnect, between trading in Treasuries, and other asset types, it is frequently referred to as a Flight-to-Safety. In a Flight-to-Safetly, traders are essentially demonstrating fear that future economic data will be sharply worse than expected. Because Treasury securities perform better than almost anything in times of poor economic data, they become quite desirable.
The Federal Reserve will begin trading based on its announcement last week that it would reinvest proceeds of MBS prepayments in Treasury debt. The effects of this action are viewed closely as the most significant influence to mortgage and bond pricing today. The program is expected to continue for some time, but today is likely to be one of the largest purchases, probably somewhere in the range of $60-$80 billion in debt, which represents a substantial portion of any day’s trades, and will likely push yields even lower.
The Treasury department will be holding a conference this morning to discuss the future of government-controlled mortgage giants Fannie Mae and Freddie Mac. The two companies were taken under conservatorship by the government as their losses mounted at the height of the mortgage crisis, and have continued to operate, bundling mortgages into mortgage-backed securities. Fannie and Freddie have stabilized somewhat in recent months, but the government doesn’t want to be involved with those institutions indefinitely.
Data this morning showed some growth in construction of new homes, with a 1.7% increase in housing starts. Permits for new construction, however, declined slightly. The economic recovery has been widely linked to the health of the housing sector, as a rebound in housing prices is needed to help millions of underwater homeowners escape their debts. As long as home prices remain depressed, it is unlikely home prices will rebound.
Elsewhere, we also saw the first hint of inflation we’ve seen in some time. The Producer Price Index, PPI, came out a few minutes ago, showing overall inflation was 0.2% in July at the business level. The PPI measures prices paid by businesses for equipment and inputs to their products and services. Core PPI, which strips out volatile food and energy costs, was up an even higher 0.3%. Prices of intermediate goods, though, were off sharply, by 0.4%. Inflation is a natural enemy of low interest rates, and has been very muted recently.
Mortgage pricing should remain relatively strong today, even if this morning’s inflation report puts some pressure on long-term yields. Changes in mortgage rates have lagged changes in treasury rates recently, as investors have focused more on safety than on return. This means that Treasury yields could actually rise slightly without having a significant impact on mortgage pricing. In the longer term, I expect mortgage pricing to continue improving throughout the week. It is safe to float mortgage rates, for now.
Tomorrow brings us a little more insight into the housing market through the Mortgage Banker’s Association’s purchase application survey, showing the number of applications for home purchase mortgages. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655. Have a great day!
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Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.
August 17, 2010 by Dan Hartman · 2 Comments
I have worked as a residential mortgage advisor since February of 2000 and a part of the founding team here at Province Mortgage. We believe that by doing right by a family today, we can create a relationship for life, and, hopefully, and ambassador who will share the experience with others. It is our team of professionals that helps us to create this experience.
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[...] week had started on a good foot for mortgage pricing on news that China had overtaken Japan as the world’s 2nd largest economy. This was triggered by a decline in the Japanese GDP growth rate to a meager 0.1%, and resulted in [...]
[...] into recession, consumers there may not have any money to spend on US exports. Remember that the Japanese economy was also in focus last week as growth there slowed to a negligible [...]