Interest Rate Roundup

Friday, December 26, 2008

Early results show dismal holiday retail sales

I can count on one hand the number of economists who were expecting the holiday shopping season to be a good one. But even the generally grim consensus forecasts apparently weren't grim enough, according to early sales results. Here are some more details from the Wall Street Journal ...

"Price-slashing failed to rescue a bleak holiday season for beleaguered retailers, as sales plunged across most categories on shrinking consumer spending, according to new data released Thursday.

"Despite a flurry of last-minute shoppers lured by the deep discounts, total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve, according to MasterCard Inc.'s SpendingPulse unit.

"When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales.

"But considering individual sectors, "This will go down as the one of the worst holiday sales seasons on record," said Mary Delk, a director in the retail practice at consulting firm Deloitte LLP. "Retailers went from 'Ho-ho' to 'Uh-oh' to 'Oh-no.'"

"The holiday retail-sales decline was much worse than the already-dire picture painted by industry forecasts, which had predicted sales ranging from a 1% drop to a more optimistic increase of 2.2%."

Wednesday, December 24, 2008

MBA: Refinance applications surge again -- and some mortgage rate history

The recent drop in mortgage rates has clearly spurred homeowners to action. Many are trying to refinance their loans to take advantage of interest rates that have fallen to modern lows. The Mortgage Bankers Association's refinance application index jumped 62.6% in the week of December 19 to 6758.6 from 4156. That's the highest level since July 2003, in the midst of the last deflation scare (the chart above shows the entire history of the series, which dates back to 1990). The purchase application index rose a much more modest 10.6% to 316.5 from 286.1.

This continues the recent trend of lower rates spurring a big increase in refinancing activity, but a much more modest rise in home buying. That makes sense when you think about it. Refinancing to lower your monthly payments and interest rate is a no-brainer if you're going to be in the house long enough to recoup the up-front cost of the transaction. But buying a house is a much different financial commitment -- one Americans aren't willing to make if they lack confidence that home prices will hold up and if they're afraid of losing their jobs.

Incidentally, Freddie Mac's 30-year rate average was 5.19% in the most recent week. That was the lowest the company has found since it started conducting its primary mortgage market survey in 1971. The book A History of Interest Rates by Sidney Homer and Richard Sylla has some mortgage rate data going back much farther than that. If you use the book's Manhattan/HUD annual average 30-year rate as your benchmark, you can't find a rate below 5.19% going all the way back to 1955 (5.18%). The lowest annual rate average this century? 4.7% in 1945.

Tuesday, December 23, 2008

November new and existing home sales both fall

We got a two-fer today: Data on both new and existing home sales for the month of November. So what did the numbers from the Census Bureau and the National Association of Realtors show?


* New home sales dropped 2.9% to a seasonally adjusted annual rate of 407,000 from 419,000 in October (originally reported as 433,000). That was slightly worse than the forecast for a reading of 415,000, and the lowest sales rate since January 1991 (401,500). Sales were off 35.3% year over year.

* The raw supply of homes for sale continues to decline due to aggressive cutbacks in home construction. It fell 7% to 374,000 from 402,000 in October. But the "months supply at current sales pace" indicator of inventory only inched down to 11.5 from a revised 11.8 in October, which was the current cycle high (and the highest level ever according to my data, which goes back to 1963).

* The median price of a new home fell 11.5% from a year ago -- to $220,400 from $249,100. That was the second-biggest drop for the cycle behind the 12.7% YOY drop in March 2008.


* Sales tanked 8.6% to a seasonally adjusted annual rate of 4.49 million units from a revised 4.91 million in October. That compared with an average estimate of 4.93 million and 5.02 million units a year earlier. It's the lowest level on record for the data series, which includes single-family homes, condos, and coops. Single-family only sales, at 4.02 million, were the weakest since July 1997 (3.88 million).

* The inventory of homes for sale inched up to 4.203 million units from 4.198 million. The "months supply at current sales pace" indicator of inventory rose to 11.2 months from 10.3 in October. That ties the cycle high set in April 2008.

* Home prices dropped 13.2% to $181,300 from $208,800 a year earlier. That is the biggest decline on record. Home prices are now at their lowest level since February 2004 ($180,900).

At the risk of sounding like a broken record player, the latest housing market figures still paint a grim picture. Both new and existing home sales fell in November. For-sale inventory readings remain at or near all-time highs. Home prices continue to slump, with double-digit declines on both the new and existing sides of the ledger.

Treasury and the Fed are doing all they can to lower mortgage rates and stem foreclosures. But they're having a very tough time fighting the simple law of supply and demand. The housing market remains dramatically oversupplied, despite very sharp cutbacks in new home construction. Moreover, demand remains weak due to slumping consumer confidence, tighter lending standards, and rising unemployment.

Bottom line: It's going to take even more time and even lower home prices to get back to a healthy state of equilibrium in housing. Anyone looking to Washington for a quick fix to this downturn is going to be disappointed.

Monday, December 22, 2008

Commercial developers lining up at the bailout window

Good Monday morning - I don't know how many people are reading out there, given the fact we're now squarely in the holiday season. But I'm still toiling away and will do my best to keep you abreast of what's going on in the markets. One key news item I can't help but highlight: The story from the Wall Street Journal today entitled "Developers ask U.S. for Bailout as Massive Debt Looms." An excerpt:

"With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

"They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

"Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.

"A recent letter sent to Treasury Secretary Henry Paulson, and signed by a dozen real-estate trade groups, painted a bleak scenario: "Right now, we believe there is insufficient systemic capacity to refinance expiring, performing commercial real-estate loans," said the letter. "For many borrowers, [credit] simply is not available," the letter noted.

"To head off some of the impending pain, the industry is asking to be included in a new $200 billion loan program initially created by the government to salvage the market for car loans, student loans and credit-card debt. This money is intended to go directly to help investors finance purchases of securities backed by these assets. If commercial real estate is included, banks might have an incentive to make more loans to developers since they'd be able to repackage and sell them more easily to investors with the assurance of government backing."

I've been saying for months on end that once you open the Pandora's Box of bailouts, you won't be able to shut it again. The government and the Fed are now on the verge of subsidizing everything from the home mortgage market to the credit card business to (potentially) the commercial real estate industry.

This is rapidly becoming a national disgrace. Whatever happened to free markets? The concept of failure for those who rolled the dice and lost? Sure it means the economy would sink into a deeper recession in the shorter-term if we ended up with more bankruptcies and foreclosures. But you know what? That's what happens to economies that binge on too much credit. You have to go through a period of pain to cleanse the bad loans, work off the excesses, and set the stage for a healthy economic rebound. Trying to get in the way of the economic cycle over and over again hasn't exactly worked out well. Witness the gigantic housing bubble we got in the wake of the dot-com bust, partially caused by the Fed's interest rate moves (which were designed to counter the tech-bust-driven recession).

Thursday, December 18, 2008

More on the dollar

I've been banging away at the currency market's "thumbs down" response to the Fed's "money-printing extravaganza" policy for a few days. Now it's getting some more notice in the mainstream press. Here's an excerpt from the Washington Post:

"The dollar yesterday staged one of its biggest one-day drops against the euro and fell to a 13-year low against the Japanese yen as near-zero interest rates and the Federal Reserve's plan to print vast sums of cash dilute the value of the greenback.

"The drops dramatically accelerated the dollar's reversal of fortune over the past three weeks after months of solid gains. The slide underscores the risks the Federal Reserve is taking to jump-start the U.S. economy through aggressive monetary policy.

"On Monday, the Fed cut its target for the federal funds rate, at which banks lend to each other, from 1 percent to a target range of 0 percent to 0.25 percent, and effectively vowed to print as much money as it needs to try to pull the United States from a worsening recession.

"While that policy may ultimately aid an economic recovery, it is robbing the dollar of value as investors anticipate less interest on their dollar-denominated investments and more bills in circulation, making each one worth a bit less. In response, investors are dumping the dollar and buying up other currencies.

"If the dollar's fall is unchecked, it could jeopardize the long-term faith of foreign investors in the value of the American currency and could cause foreign investors to dump U.S. stocks and other assets, whose value would be worth less in euros or yen. The Dow Jones industrial average fell 1.1 percent yesterday."

The Japanese are starting to get fed up (if you'll pardon the pun). Overnight, they "verbally intervened" in the currency markets to stop the yen's appreciation. More from Bloomberg:

"The yen fell from near a 13-year high against the dollar and tumbled versus the euro after Japan’s government signaled it may intervene in the foreign- exchange market for the first time in four years.

"Finance Minister Shoichi Nakagawa said he has “the means” to limit the yen’s advance, which undermines Japanese exporters by raising prices for overseas customers. The dollar erased its annual gain against the euro on bets the Federal Reserve’s near- zero interest-rate policy will reduce the appeal of U.S. assets. The pound tumbled to a record against the euro for a ninth day.

“The rhetoric from Japan picked up in a fairly significant way in the past 24 hours,” said Jim McCormick, London-based global head of foreign-exchange and local-markets strategy at Citigroup Inc., in an interview on Bloomberg Radio. “If you’re going to intervene, why not do it in what is probably going to be one of the most illiquid periods of what has been a pretty illiquid year, which is the time between now and the end of the year.”

"The yen fell 1.2 percent to 88.29 per dollar at 8:46 a.m. in New York, from 87.24 yen yesterday, when it reached 87.14, the highest level since July 1995. The euro increased 2.7 percent to 129.23 yen from 125.80 yesterday. The dollar dropped 1.5 percent to $1.4639 per euro from $1.4419, weakening beyond $1.47 for the first time since Sept. 25.

"The dollar depreciated 21 percent against the yen this year, the most since 1987, as more than $1 trillion of credit- market losses sparked a seizure in money markets and threw the world’s largest economy into a recession."

The question is now whether Japan puts its money where its mouth is. And of course, we have to wonder if the European Central Bank will continue to put up with the euro's appreciation, which puts Europe's economy at a competitive disadvantage. As for bonds, there has still been no discernible impact from the dollar fluctuations. Bonds continue to rise in price in what has truly become an unprecedented move in terms of magnitude and speed.

Wednesday, December 17, 2008

Fed cut -- the day after

Lots of talk this morning about what the Fed cut does or doesn't mean, for the near and long term. Me? I can't help but continue to watch the absolute train wreck in the currency markets. The Dollar Index was recently down ANOTHER 208 basis points to about 78.57. This is a move of about 2.6% after a 1.9% drop yesterday and a 1.6% drop the day before. The DXY is down in seven of the past eight days. Everything from the yen to the Hungarian forint is rallying against the buck.

I don't know at what point the move becomes "disorderly" -- something currency traders and central bankers hate to see. And I still see NO evidence this is impacting the bond market. In fact, long bond futures are up another 2 25/32 as I write. Mortgage bonds are rallying as well, driving mortgage rates lower. But you just have to wonder how much longer foreign creditors will just "grin and bear it." We're not a surplus nation like Japan was when it embarked on its ZIRP policy. We're a debtor country that relies on foreign inflows to sustain itself. I just hope Ben Bernanke's good luck continues -- for all of our sakes.

Tuesday, December 16, 2008

Fed shifts into "ZIRP" mode; To blow up balance sheet

The Fed just pulled out its version of the Paulson "bazooka." It decided to cut the federal funds rate to a range of 0% to 0.25%. This is a Fed version of Japan's ZIRP -- Zero Interest Rate Policy. The Fed also promised to use "open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level." In other words, it's going to buy "large quantities" of Fannie Mae and Freddie Mac debt, as well as their mortgage backed securities. And it will evaluate whether it should buy long-term Treasuries as well. Finally, the discount rate will be cut 75 basis points to 0.5%.

Here is the complete statement:

"The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

"Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

"Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

"The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

"In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent."

Market reaction: Bonds way up, stocks way up, dollar way down, gold way up

Housing starts implode 18.9% to record low; CPI falls 1.7%

We just got some key economic data, and it really shows an economy that's on the ropes. Some details:

* Housing starts imploded 18.9% to a seasonally adjusted annual rate of just 625,000 units in November. That was down from 771,000 in October and far worse than the average economist forecast of 736,000. Building permits also tanked by 15.6% to 616,000 from 730,000 in October (economists were looking for a reading of 700,000).

* Single-family starts dropped 16.9% on the month, while multifamily starts fell 23.3%. Single-family permits fell 12.3%, while multifamily permits dropped 21.5%. Here's something else to noodle: Housing starts are now off a whopping 72.5% from their January 2006 peak of 2.273 million. These are the lowest starts figures the government has ever recorded since it began tracking in 1959. This is also the biggest peak-to-trough (?) decline on record.

* The Consumer Price Index plunged 1.7% in the month of November, a bigger decline than the 1.3% economists were looking for and the single-biggest monthly decline since the government began tracking in 1947. The core CPI was unchanged, against forecasts for an increase of 0.1%. That brought the year-over-year increase in the CPI down to 1.1% from 3.7% a month earlier, and the YOY core CPI down to 2% from 2.2%.

Fed to cut rates today, but does anyone care (besides currency traders)?

It's another "Fed day" today, with the FOMC's two-day policy meeting set to wrap up later and the results to be announced at roughly 2:15 eastern. Market betting is that the Fed will cut rates by 50 basis points to a record-low 0.5%. But one has to wonder if that really matters. The "effective" federal funds rate, determined by actual trading in the market, was just 18 basis points yesterday.

The real question is how will the Fed further explain or define its new strategy of quantitative easing and flooding the banking system with reserves. Or as Bloomberg explains things this morning ...

"The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

"The Fed’s Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

"Chairman Ben S. Bernanke plans new steps to combat the credit crunch and prevent the worst recession in a quarter century from turning into a depression. The danger is the Fed’s credibility could be hurt if policy makers don’t clearly communicate a new strategy of manipulating the supply of money, at a time when FOMC members have diverging views on the subject.

“We expect the FOMC to leave the policy outlook open- ended,” said Louis Crandall, chief economist at Wrightson ICAP LLC, the world’s largest broker of trades between banks, in Jersey City, New Jersey. “The FOMC may have no choice but to muddle along for a while longer” because “there is no sign that a consensus on a new approach has begun to emerge,” he said.

"Investor speculation that the Fed will ease monetary policy today pushed yields on 10-year Treasury notes to the lowest since 1954. The dollar traded near a two-month low against the euro and was close to its weakest level in 13 years versus the yen."

The AP expands a bit further on how this Japan-like strategy of quantitative easing works, in case you aren't familiar with the mechanics ...

"Bernanke says the Fed is weighing other ways to aid the economy given that it can lower the funds rate only so far -- to zero.

"For example, the Fed could buy longer-term Treasury or agency securities on the open market in substantial quantities. This might lower rates on these securities and help spur buying appetites.

"A Fed program announced late last month to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae and Freddie Mac already has helped pushed mortgage rates down.

"By boosting the quantity of money in the financial system, the Fed has engaged in so-called "quantitative easing" to provide economic relief. The Fed's balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting efforts to mend the financial system."

Incidentally, the Fed's policy of quantitative easing continues to hammer the dollar. The Dollar Index has now plunged from a high of 88.46 on November 21 to just 81.77 today (it's down about 49 bps on the day as I write). That's a very large move in a short period of time for currencies. No repercussions ... yet ... in the Treasury market. But like I said, just because something hasn't happened yet doesn't mean it won't.

Monday, December 15, 2008

NAHB index holds at record low in December

The National Association of Home Builders released its Housing Market Index for December today. The details ...

* The overall index held at 9 in December. This tied November's record low for the series, which dates back to 1985.

* Among the subindices, the one measuring current single family home sales dipped to 8 from 9 ... the one measuring expectations about future sales slumped to 16 from 18 ... while the one measuring prospective buyer traffic held steady at 7.

* Regionally, the Northeast index held at 11, while the West index inched up to 7 from 6. Meanwhile, the Midwest index slumped to 6 from 7 and the South index dropped to 10 from 12.

If you're looking for signs of life in the housing market, you're not going to find them in today's numbers. Two out of three sub-indices declined in December, while the overall index held at a record low. It appears the crummy economy and rising unemployment are offsetting -- or overpowering -- the impact of lower mortgage rates.

The Federal Reserve and Treasury Department are unlikely to stop searching for the right combination of incentives to spur home sales and improve market confidence. The open question is whether there truly IS a solution other than what I keep repeating: "time and price." I remain skeptical.

Dollar annihilated ... again. Plus, are Japanese investor flows going to dry up?

The dollar is getting annihilated again this morning, with the Dollar Index down about 122 bps as I write. At 82.43, the DXY is trading at its lowest level since late October. The key two-part question I have been asking is quite simple: Will the dollar decline continue and if so, what impact will it have on demand for dollar assets, including U.S. Treasuries?

The latest TIC data showed plenty of foreign demand (as of October) for U.S. Treasuries. But that was mainly because those same foreign investors were busy dumping just about everything else (agency bonds, stocks, corporate debt, and so on).

Meanwhile, the Wall Street Journal has a great story about the longer-term inflow of funds to the U.S. from Japan. Sick of near-zero yields in Japan, investors over the years have flocked to overseas bond markets in search of higher returns. But now, the Fed has cut rates to the bone, and some U.S. Treasuries are yielding 0%. So the question becomes: Why invest here? More below from the WSJ ...

"Higher rates in the U.S. have lured many Japanese investors, including its giant insurance companies and pension funds, into dollar-based assets such as U.S. Treasurys. Japan held $573 billion of U.S. Treasury securities in September, according to Treasury Department data, making it the world's second largest investor after China.

"Rate cuts in the U.S. could eventually push down returns on these assets and eliminate their appeal for Japanese investors.

"The yield differential has already been reversed for government securities with short maturities. On Tuesday, the U.S. Treasury Department sold four-week bills in an auction at a yield of zero for the first time as investors poured into what they saw as the ultimate safe haven.

"It would be hard to imagine a more propitious environment for a buyers' strike of U.S. paper," said Peter Tasker, an analyst for Dresdner Kleinwort in Tokyo.

"While few experts expect an immediate exodus of Japanese investors from Treasurys, there are some signs Japanese investors are beginning to reduce investments abroad. Between September and November, Japanese mutual funds sold medium-term and long-term foreign bonds worth 899 billion yen ($9.87 billion) on a net basis, compared with a net purchase of 593 billion yen during the same period a year earlier."

Friday, December 12, 2008

It's Bank Failure Friday again

The latest failure? Haven Trust Bank of Duluth, Georgia. The FDIC arranged the purchase of Haven's deposits (both insured and those above the insurance limit) by Branch Banking & Trust (BBT). Haven had four branches, assets of $572 million, and deposits of $515 million. BBT is only buying $55 million of Haven's assets, leaving the FDIC stuck with the rest. The FDIC estimates it will take a $200 million hit to the Deposit Insurance Fund resolving the failure. Haven is the 24th bank failure this year.

Shortly thereafter, we also got failure #25. Sanderson State Bank of Sanderson, Texas, failed, with the FDIC arranging for the assumption of all deposits by Pecos County State Bank of Fort Stockton, Texas. Sanderson is small-time -- a one branch operation with just $37 million in assets and $27.9 million in deposits. Pecos is only buying $3.8 million of Sanderson's assets. Total DIF costs to the FDIC: Only an estimated $12.5 million.

Autos: To bail or not to bail?

Last night, the Senate refused to follow the Senate down the GM bailout path. From the New York Times ...

"The Senate on Thursday night abandoned efforts to fashion a government rescue of the American automobile industry, as Senate Republicans refused to support a bill endorsed by the White House and Congressional Democrats.

"The failure to reach agreement on Capitol Hill raised a specter of financial collapse for General Motors and Chrysler, which say they may not be able to survive through this month.

"After Senate Republicans balked at supporting a $14 billion auto rescue plan approved by the House on Wednesday, negotiators worked late into Thursday evening to broker a deal but deadlocked over Republican demands for steep cuts in pay and benefits by the United Automobile Workers union in 2009.

"The failure in Congress to provide a financial lifeline for G.M. and Chrysler was a bruising defeat for President Bush in the waning weeks of his term, and also for President-elect Barack Obama, who earlier on Thursday urged Congress to act to avoid a further loss of jobs in an already deeply debilitated economy."

This morning, the White House is sending out signals that it may be willing to use TARP funds after all to bail out the automakers. That has helped lead to a spike in stock market futures. But the harsh reality is that the economy is still in awful shape. We just learned this morning, for instance, that retail sales dropped 1.8% in November, a record fifth month in a row of declines. That means there are going to be large capacity cuts, wage concessions, and massive layoffs at GM and Chrysler whether they reorganize in or out of the bankruptcy courts.

Thursday, December 11, 2008

Dollar getting pasted; Latest on bonds

Of all the markets out there I'm watching, the currency market deserves a special mention today. The Dollar Index (DXY) is getting pasted to the tune of 160 basis points. That's a big move for the DXY, which is currently trading at 83.89. What's particularly noteworthy is that the dollar is losing against almost everything. Usually "risk-averse" currencies like the yen fall against the buck when currencies like the Euro and Pound rise. But today, the yen is up, the euro is up, the pound is up, and the commodity dollars (Aussie, New Zealand, Canada) are up. Heck, even the Indian rupee, the Brazilian real, and other emerging market currencies are rallying.

Will this impact bond prices at some point? One wonders. Foreign investors owned $2.86 trillion, or 53.6%, of the $5.34 trillion in outstanding, marketable Treasuries as of September (Data available here).

UPDATE: The DXY is now down 200 bps. This is a big move. Meanwhile, long bond futures are at the day's low -- down 26/32 in price.

UPDATE2: Indirect bidding was weak at the government's sale of $16 billion in 10-year Treasury Notes. That category of buyers (which includes foreign central banks) snapped up just 12.7% of the deal, the least since 5.8% in March 2008. However, the notes sold at a lower yield than forecast (2.67%) and the bid-to-cover ratio was strong at 2.44 (the highest since September). Bonds have rallied off their lows on this news, with the futures recently up 9/32 in price.

Wednesday, December 10, 2008

Message in a board foot?

With my apologies to The Police, I'm wondering if the message isn't in a bottle, but rather a board foot. Of lumber, that is. Take a look at this chart above. It shows the price of lumber futures.

Lumber has been cascading lower in the past several days, recently breaching its October low and trading at about $168 per 1,000 board feet. Could this be signalling a fresh leg down in housing activity, TARP money and Fed MBS buying be darned? We'll see. Past declines in lumber have been a nice leading indicator of housing sector prospects.

Fed to issue its own debt?

Things keep getting curioser and curioser over at the Federal Reserve. According to the Wall Street Journal, the Fed is now considering issuing its OWN debt for the first time ever. As you probably know, the Treasury is the primary institution that issues U.S. government debt. More below on this very odd development ...

"The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

"Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.

"Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

"It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency."

Tuesday, December 09, 2008

Four-week bills yield nothing. Yes, nothing.

Can you truly get money for nothing? Apparently yes, if you're the federal government. The Treasury just sold $30 billion in four-week T-bills at a yield of ... drum roll please ... nothing! Literally 0%. Think that's odd? Well, how about the fact the bid-to-cover ratio was 4.2. In other words, there were $4.20 worth of bids for every $1 in bills being offered. The bid/cover ratio hasn't been higher than that since January 2002.

Money for nothing is all well and good. But I have to ask, did Uncle Sam -- in the immortal words of Dire Straits -- also get any "chicks for free?" That's the true measure of success.

Pending home sales dip 0.7% in October

The National Association of Realtors just released its report on October pending home sales. Here's what the figures showed:

* Pending home sales dipped 0.7% in October. That was better than the 3% decline that economists were expecting. September's reading was revised to -4.3% from -4.6%.

* The pending home sales index, at 88.9, was down 1% from its year-earlier reading of 89.8. The cycle low was 83 in March.

* Geographically, pendings rose 0.6% in the Northeast and 7.8% in the South. But they declined 4.3% in the Midwest and 8.7% in the West.

It was a bit of a mixed bag for pending sales in October. Pendings rose in two regions, but fell in two others. That resulted in a net decline, but one that was smaller than forecast.

Conditions appear mixed in the near term. The Treasury and the Fed are doing all they can to drive down mortgage rates, and they have had some success. Lower prices in some of the hardest hit markets, and almost irresistible bargains on distressed properties, are also bringing some buyers out of the woodwork. On the other hand, the economy continues to struggle and unemployment continues to rise. I expect sales to remain choppy over the next couple of months as these opposing forces duke it out.

Some musings on the deficit, Treasuries

There was an interesting column at the Wall Street Journal site today about the long-term implications of all this borrowing and spending the country is doing. It talks about how President-Elect Obama will have to balance the demand for bailout money from everyone and anyone against the need to ... eventually ... get the deficit under control. An excerpt:

"Being Santa Claus is fun. Delivering the credit-card bills later is much less fun. And so it will be for U.S. President-elect Barack Obama. He will get to play Santa Claus at the outset of his term, telling people they can spend hundreds of billions of dollars in the name of stimulus. Later, of course, he'll have to play Scrooge, telling the country that the bill has come due.

"The challenge for the Obama team is making sure Americans in general, and Congress in particular, remember that both roles lie ahead for the new president. The task, in the words of one senior Obama aide, is to make sure that people don't think the model for stimulus spending in coming months is "backing in the Brink's truck and opening up the door."

"More broadly, Mr. Obama's team needs to figure out whether there are steps it can take at the outset to build its credibility on fighting deficits in the long run, even as it accepts them in the short run. Such measures are possible and would help calm financial markets as red ink spreads."

So how much red ink could we be looking at as a country? Again, from the Journal ...

"The $455 billion deficit for the fiscal year that ended Oct. 1 already is the largest on record in dollar terms. As a percentage of gross domestic product, though, it amounts to 3.2%, less than at the peak of the 1980s downturn.

"But the deficit will be a lot worse next year, likely reaching between $750 billion and $1 trillion, depending on how costs of the financial-sector bailout are accounted for. The only real question is whether the deficit, as a percentage of GDP, cracks the postwar record of 6% set in 1983. If the red ink hits $900 billion or so, it will."

We keep being told not to worry about the surge in the deficit and U.S. borrowings (Treasury is selling $28 billion in 3-year notes tomorrow and $16 billion in 10-year debt on Thursday). We keep being told this is no big deal. And so far at least, the Treasury bond market has not rebelled against Washington's profligacy. But just because it hasn't happened yet, doesn't mean it won't.

Monday, December 08, 2008

Redefault rates in focus

John Dugan, Comptroller of the Currency, had some interesting comments earlier today that are worth highlighting. He notes that loan modifications aren't a panacea for foreclosure prevention for a simple reason -- many times, mods don't work. Borrowers often "re-default" even after getting some relief from their lenders. That's especially true in times like these when home prices are falling, unemployment is rising and many borrowers, quite frankly, just bought too much house.

Here is an excerpt from his comments below ...

"Of course, it stands to reason that the more mortgages that are modified, the fewer should result in foreclosure starts. But how true is that statement? In an attempt to shed light on this question, we collected a new data element in our Mortgage Metrics for the third quarter. Specifically, we asked our servicers to track the extent to which mortgage modifications earlier in the year were successful, in this sense: what percentage of borrowers re-defaulted on their mortgages after the modification was completed, and how quickly did they do so?

"The results, I confess, were somewhat surprising, and not in a good way. Take the loans that were modified in the first quarter of this year. After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent. The data is similar for mortgages modified in the second quarter: the re-default rate after three months was 39 percent, and after six months, 51 percent.

"I have a basic chart (AVAILABLE HERE) illustrating these numbers that we will post on our website with these remarks, and its upwardly sloping lines vividly demonstrate the monthly increases in re-default rates. Put simply, it shows that over half of mortgage modifications seemed not to be working after six months."

Friday, December 05, 2008

Mortgage delinquency, foreclosure rates surge to new records in Q3

The Mortgage Bankers Association just released its latest data on mortgage delinquencies and foreclosures, covering the third quarter of this year. Without further adieu, here's a look at the numbers:

* The overall mortgage delinquency rate rose again to 6.99% from 6.41% in Q2 2008 and 5.59% a year earlier. This is yet another record high for the delinquency rate (the MBA data goes back to 1979).

* The subprime DQ rate resumed its rise -- climbing to 20.03% from 18.67% in Q2 2008 and 16.31% a year earlier. This is a fresh high. And as I have noted several times, this mortgage crisis stopped being just about subprime long ago. The prime-only delinquency rate rose to 4.34% from 3.93% in Q2 2008 and 3.12% a year earlier.

* Delving further into the numbers, Prime ARM DQ rates rose to 8.2% from 7.49% in Q2 2008, while subprime ARM DQs climbed a bit to 21.31% from 21.03%. Meanwhile, the DQ rate on FHA loans inched up to 12.92% from 12.63% a quarter earlier.

* The percentage of mortgages entering the foreclosure process dipped ever so slightly -- to 1.07% from 1.08% a quarter earlier. But the overall percentage of mortgages in any stage of foreclosure rose again to 2.97% -- up from 2.75% in Q2 2008 and 1.69% a year earlier. A whopping 12.55% of subprime mortgages are now in some stage of foreclosure.

November employment report dismal

The November employment report was every bit as dismal as economsits expected, and then some. The economy shed a whopping 533,000 jobs last month, far above expectations for a reading of -335,000 and the single-worst reading going all the way back to December 1974. October's job loss total was revised up to -320,000 from -240,000 and September's loss was revised to -403,000 from -284,000.

The unemployment rate climbed to 6.7% from 6.5% in October. Average hourly earnings did increase 0.4%, up from 0.3%. But that was about the only good news. The private nonfarm diffusion index, which measures industries who are cutting jobs against industries that are adding them dropped to 27.6 from 37.8.

Thursday, December 04, 2008

The new mortgage plan: Get rates to 4.5% at all costs!

We've seen some additional reporting overnight on how this new proposed program from the Treasury to drive down mortgage rates will work. Apparently, the idea is to have Fannie Mae and Freddie Mac pay high prices for loans from lenders. This would allow the lenders to charge borrowers as little as 4.5% for 30-year loans. The U.S. Treasury will then buy mortgage backed securities with those loans in them. It will, of course, fund these purchases by selling Treasuries because we all know the U.S. government is running a giant deficit and doesn't have the money for this program just lying around somewhere.

The idea is to "play the spread" -- sell U.S. Treasuries yielding, say, 3% and buy MBS yielding, say, 4.5%. These newly subsidized loans would only be good for home buyers, not refinancers, and applicants would still have to meet the conventional loan qualifying standards set by Fannie and Freddie.

Forget for a minute the fact the release of this news now could just cause potential home buyers to hold off in the hope they'll get a lower rate later. Think instead about what this means for the U.S. longer term. We are talking about turning the U.S. Treasury into a giant hedge fund, or bank, if you want to be generous.

What I want to know is, won't this impact the perceived credit quality of U.S. debt obligations? Or the dollar for that matter? If we are acting like a bank/hedge fund, and selling hundreds of billions of dollars of debt to fund all these programs, shouldn't we be forced to pay up for money? There are early signs in the Credit Default Swap (CDS) market that investors are starting to ask themselves this very question.

Take a look at the chart above, which shows the cost (in basis points) of insuring 10-year U.S. sovereign debt against default. You can see it has risen to 65 bps from just 9.7 bps as recently as April -- meaning it costs about 65,000 euros (the contract is denominated in euros because, obviously, you don't want protection denominated in the currency of the country whose default you're insuring against) per 10,000,000 euros in U.S. debt.

Now I'll stipulate that this is peanuts compared to the cost of CDS insurance on many private credits (looking for GM protection? That'll be 6,915 bps please). And I'll aslo stipulate that bond prices have been flying this week, showing that RIGHT NOW, bond investors aren't selling into this news. But how long will this last? Can we really just keep borrowing like crazy, putting higher-risk securities onto the U.S.'s balance sheet, and have investors grin and bear it forever?

UPDATE: Fed Chairman Bernanke also just gave a speech suggesting other ways to restructure loans to avoid foreclosure, using goverment-provided subsidies. You can read the complete speech here.

Wednesday, December 03, 2008

Overseas interest rate update -- cuts all around

This week has been a big one, at least as far as foreign central banks are concerned. The Reserve Bank of Australia cut that country's benchmark interest rate by 1 percentage point to 4.25% on December 2. The Reserve Bank in New Zealand cut its benchmark rate by a whopping 1.5 percentage points to 5% yesterday. Sweden's Riksbank went one further, cutting rates by 175 basis points to 2%. Meanwhile, the Bank of England cut rates by 1 percentage point to 2% and the European Central Bank cut by a larger-than-expected 75 basis points to 2.5%.

Fed's Beige Book: The economy stinks

No surprise here -- the Federal Reserve's latest "Beige Book" report on the economy says things stink. Tourism stinks. Retail stinks. Manufacturing stinks. Housing stinks. Commercial real estate stinks. Agriculture, mining, and energy are starting to stink. Oh and the job market stinks.

The "Fedspeak" version of my summary can be found below ...

"Overall economic activity weakened across all Federal Reserve Districts since the last report. Districts generally reported decreases in retail sales, and vehicle sales were down significantly in most Districts. Tourism spending was subdued in a number of Districts. Reports on the service sector were generally negative. Manufacturing activity declined in most Districts, and new orders were soft. Nearly all Districts reported weak housing markets characterized by reduced selling prices and low, but stable, sales activity. Commercial real estate markets declined in most Districts. Lending contracted, with many Districts reporting reductions in residential, commercial and industrial lending and tightening lending standards. Agricultural conditions were mixed with a relatively good harvest but concerns about profitability. Mining and energy production and exploration started to soften due to lower output prices.

"District reports generally described labor market conditions as weakening. Wage pressures were largely subdued. District reports characterized price pressures as easing in light of some decreases in retail prices and declines in input prices, particularly energy, fuel, and many raw materials and food products."

Fed buys the biggest rise in mortgage applications ever

The Federal Reserve got quite a bit of bang for its buck out of its announcement to buy up to $500 billion worth of Mortgage Backed Securities and up to $100 billion of debt issued by Fannie Mae and Freddie Mac. According to the Mortgage Bankers Association, we just saw the single-biggest weekly rise in applications in the history of the group's index, which dates back to 1990.

The overall index shot up 112% to 857.7 from 404.40 (chart above). The refinance index soared 203.3% to 3802.80 from 1254, while the purchase index climbed a more modest 38% to 361.1 from 261.60. The average rate on a 30-year mortgage, according to the MBA, fell to 5.47% in the week of November 28 from 5.98% a week earlier. That was the lowest since June 2005.

In simple terms, the Fed gave mortgage holders and home shoppers an early Christmas gift. But let's qualify the data a bit here. Conversion rates (submitted applications that actually turn into closed loans) are lower today because qualifying standards are tighter. Many borrowers who apply for loans will also likely find they don't have the equity to refinance, given the decline in home prices. And as long as unemployment is climbing and the economy is weakening, the impact on the home PURCHASE market should be much more muted than the impact on the REFINANCE market. Indeed, purchase applications rose at a relatively modest pace compared with refinance apps.

Tuesday, December 02, 2008

States next in line at the bailout trough

Looks like the states are next in line for a bailout, right behind the automakers, banks, brokers, insurers, money market mutual funds, and Cousin Sue from Milbrook, N.D. (I made that last one up). From the New York Times ...

"President-elect Barack Obama turned from national security to domestic concerns on Tuesday, telling the country’s governors that his administration would not delay in pushing an economic recovery plan that would bring relief to the states, 41 of which are forecasting budget shortfalls this year or next.

"Speaking at a conference of the National Governors Association in Philadelphia, Mr. Obama said his background in the Illinois state senate made him particularly sympathetic to the needs of state and local governments. And he declared himself open to good ideas that work, whether they come from Democrats or Republicans.

“We are not going to be hampered by ideology in trying to get this country back on track,” he told the governors, many of whom he met for the first time at the conference. “We want to figure out what works.” Vice President-elect Joseph Biden Jr. also attended the meeting.

"Aides to Mr. Obama have suggested that a recovery plan, which the president-elect hopes to be able to sign not long after taking office on Jan. 20, might carry a price tag of as much as $700 billion."

I'm not trying to make light of the problems facing states like California, which is facing a whopping deficit of $28 billion over the next year and a half. I'm just noting how this "bail out everyone" stuff is getting a bit nuts. The Fed is openly practicing a "print money and then drop it out of helicopters" monetary policy. The Treasury is borrowing like mad and buying every asset besides Little Billy's baseball card collection. And it seems like Washington is refusing to say "No" to anyone. Meanwhile, the total cost of all these bailouts -- and the debt we're going to stick our children and our children's children with to pay for them -- is climbing trillions of dollars at a time.

Monday, December 01, 2008

Bernanke planning to keep the Fed's helicopters flying

If there were any doubt that the Fed has fired up its helicopters -- and is planning to keep them flying -- Chairman Ben Bernanke eliminated it today. He talked about several of the "unconventional" ways the Fed is trying to stimulate the economy, and how it will continue to pull out all the stops for the foreseeable future, unintended consequences be darned. More comments from his speech in Austin, Texas below ...

"Going forward, our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth that we face. I will conclude my remarks by discussing the policy options of the Federal Reserve, focusing on the three aspects of policy that I laid out earlier: interest rate policy, liquidity policy, and policies to stabilize the financial system.

"Regarding interest rate policy, although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited. Indeed, the actual federal funds rate has been trading consistently below the Committee's 1 percent target in recent weeks, reflecting the large quantity of reserves that our lending activities have put into the system. In principle, our ability to pay interest on excess reserves at a rate equal to the funds rate target, as we have been doing, should keep the actual rate near the target, because banks should have no incentive to lend overnight funds at a rate lower than what they can receive from the Federal Reserve. In practice, however, several factors have served to depress the market rate below the target. One such factor is the presence in the market of large suppliers of funds, notably the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which are not eligible to receive interest on reserves and are thus willing to lend overnight federal funds at rates below the target. We will continue to explore ways to keep the effective federal funds rate closer to the target.

"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver -- the provision of liquidity -- remains effective. Indeed, there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in GSE debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.

"Second, the Federal Reserve can provide backstop liquidity not only to financial institutions but also directly to certain financial markets, as we have recently done for the commercial paper market. Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets. In this spirit, the Federal Reserve and the Treasury jointly announced last week a facility that will lend against asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The Federal Reserve's credit risk exposure in this facility will be minimized because the collateral will be subject to a "haircut" and because the Treasury is providing $20 billion of EESA capital as supplementary loss protection. Each of these approaches has the potential to improve the functioning of financial markets and to stimulate the economy.

"Expanding the provision of liquidity leads also to further expansion of the balance sheet of the Federal Reserve. To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed's balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.

"Finally, working together with the Treasury, the FDIC, and other agencies, we must take all steps necessary to minimize systemic risk. The capital injections into the banking system under the EESA, the FDIC's guarantee program, and the provision of liquidity by the Federal Reserve have already served to greatly reduce the risk that a systemically important financial institution will fail. We at the Federal Reserve and our colleagues at other federal agencies will carefully monitor the conditions of all key financial institutions and stand ready to act as needed to preserve their viability in this difficult financial environment."

Incidentally, bonds are flying on this hint of buying long-term Treasury securities (the announced plan from the other day referred to Fannie and Freddie corporate debt and their Mortgage Backed Securities). The long bond futures were recently surging 3 12/32 in price (chart above). Ten-year Treasury yields are plunging by more than 24 basis points to 2.67%.

It's "official" -- NBER says the U.S. has been in recession since December 2007

The group responsible for "officially" dating recessions came out today and declared that the U.S. entered recession almost a year ago -- in December 2007. More details from their release below ...

"The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

"A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

"Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

"The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then.

"The committee believes that the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis. In concept, the two should be the same, because sales of products generate income for producers and workers equal to the value of the sales. However, because the measurement on the product and income sides proceeds somewhat independently, the two actual measures differ by a statistical discrepancy. The product-side estimates fell slightly in 2007Q4, rose slightly in 2008Q1, rose again in 2008Q2, and fell slightly in 2008Q3. The income-side estimates reached their peak in 2007Q3, fell slightly in 2007Q4 and 2008Q1, rose slightly in 2008Q2 to a level below its peak in 2007Q3, and fell again in 2008Q3. Thus, the currently available estimates of quarterly aggregate real domestic production do not speak clearly about the date of a peak in activity.

"Other series considered by the committee—including real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment estimates based on the household survey—all reached peaks between November 2007 and June 2008."

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