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Posts Tagged ‘mortgage rates’

Did you ever wonder why mortgage rates have been so low this year?  Well, let me take you on a journey.  Mortgage rates are influenced by government bond interest rates.  Government bond interest rates are influenced by the price of Government bonds.  If bond prices go up, then interest rates go down.  In order to raise the money to pay for all of the irresponsible spending of the Government, the Treasury sells Government Bonds.  Institutions, other countries, investment firms, etc. buy the bonds from the Government.  That money then goes to work to pay for all of the spending created by the Government.

The Government has a lot riding on those government bond sales or auctions.  If they go well, the Government sells the bonds and gets the money, bond prices go up, and interest rates stay low.  Since most people don’t want to lend the US money because we are in so much debt as it is, someone had to step in and help buy those bonds.  Yes, the Federal Reserve Board has been buying bonds all year creating more debt and keeping bond prices higher and interest rates lower.  I will not even go into how incredibly irresponsible it is for the US to buy its own bonds.  That goes without saying – the problem is that program is coming to a grinding halt at the end of this week following the largest bond auction on record this week – 123 billion dollars worth of government bonds to be issued.  The Fed will get out of the way and the bond markets will be allowed to function freely again.  That might not be so good.

Interest rates started going up today and are at a 2 month high.  What happens when you suppress something that should be going up and then stop?  It is like compressing a spring.  If you let go of the spring, it takes off.  I think that the same thing could happen with interest rates.  If this happens it could disrupt the credit markets, consumer interest rates will go up, businesses will have even more trouble borrowing money, and homeowners will now have trouble getting low cost mortgages. 

The stock market would have a tough time with raising rates.  However, the rising interest rates should help the dollar. If the dollar is going up, the price of gold should take a hit.  Welcome to Deflation!  The economy might start the debt detox process that should have started when this crisis started. 

If you are looking for a catalyst, this could be it.  Interest rate risk is not something that the stock market is ready to face.  However, China and others would certainly like to see the value of our dollar go back up.

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It really is amazing to me as I look over the latest consumer confidence numbers.  The prior month’s reading showed a better than 50% surge in confidence. This last month reported a 34% higher than expected surge again in consumer confidence.   The reason for the optimism, reports the conference board, is the “recent jumps in the stock market, low mortgage rates and smaller job losses.” 

Following the report of the confidence numbers, we see that home values fell 18% last month as foreclosures surged.  This sure doesn’t inspire confidence.   My favorite part of that report is the optimism over “smaller job losses.”  Remember that the stock market had a very good day once the May unemployment numbers came out showing a much better than expected number.   The loss of jobs was nothing like everyone feared. Of course, the Government estimated that 226,000 jobs were created that month.  That goes a long way to make the end result “look” as if the unemployment numbers are turning around.

So, here we go once again.  Although the consumer is facing enormous debt problems, the country’s future has been a mortgage away, foreclosures are in crisis mode, real estate is nowhere near the bottom, unemployment is not getting any better, etc., the consumer is confident.  Once those numbers were released today the market took off.  Investors were simply giddy over the new found confidence.   I realize that some of you might wonder when I might get some confidence back in these numbers and the system.  It will be tough for me to get overly excited when the system is broken and the numbers are highly suspicious.  Do you really believe that there is that much confidence?  Well, the stock market is making a big bet that those numbers reflect reality. 

There is a huge confidence bubble being created.  I wouldn’t want to be heavily invested when that bubble bursts.

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