Friday, January 23, 2009

Mortgage rates rise on inflation????

Today I was checking out mortgage rates with hopeful thinking that they would continue to fall, and at some point, some demand in the housing market would develop. I went to and saw that mortgage rates, along with Treasuries on the longer end of the yield curve, ebbed upward over the last week
The benchmark 30-year fixed-rate mortgage rose 31 basis points to 5.59 percent, according to the national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.30 discount and origination points. One year ago, the mortgage index was 5.57 percent; four weeks ago, it was 5.84 percent.
Overall, mortgage rates are essentially unchanged from a year ago. But then, in the same article, I read that bond investors are worried about inflation with the oncoming $825 billion stimulus package (expected to be on Obama's desk by Feb. 16th):
When bond investors foresee inflation, the result is higher bond yields. That carries into higher mortgage rates. Maybe it's not a coincidence that, in the last week, the biggest jump in bond yields happened on President Barack Obama's inauguration day. The new president and his advisers have said that it would be safer to err on the side of overspending, rather than not spending enough.
This is completely ridiculous. Bond investors are still worried about deflation - falling prices - and most certainly not about inflation. Look at the expected inflation rate in the Treasury Inflation Protection Securities (TIPS) market (Source data is from the Fed, here):

The chart lists the market inflation expectations through January 21, 2009, which sits at 0.58%. That is the difference between the nominal 10-yr Treasury bond and the inflation-adjusted (real return) 10-yr TIPS.

The market expects annual inflation will be just 0.58% for the next 10 consecutive years! That is quite remarkable, and to me, rather unthinkable. With the amount of reserve base that Bernanke's pumping out, I find it quite impossible that inflation would be less than 1% for even the next two years.

Rebecca Wilder


  1. It's always speculation when these articles are trying to assign a reason to market moves. I agree with you that deflation is going to dominate for the near future, but I just can't see the gov't being able to mop all this up to prevent inflation in the future.

    Alternative explanation from me (another speculation): people are starting to leave the longer term bond market for alternatives since they don't consider it such a safe haven, including US Debt.

  2. Rebecca,

    Even if the mortgage rate, the rate to rent cash is 5.59%, the real rate is much higher.

    If prices are falling 15% at an annual rate, the real rate is 20.59%.

    Who wants pay that much for renting cash, except a madman?

  3. Odd how the market thinks it can look out 10 years - it can barely look out 10 minutes without getting spooked! Inflation is in the cards for us and it won't be gentle. Maybe by next year, some can look into the future with more surety, but not now.

  4. Hey Smack,

    You are right - nominal rates are low, but real rates are rising. This is the problem when prices are falling. Bad for investors - businesses and homebuyers.


  5. Yes and prices are falling because old prices were unrealistic, inflated and unsustainable.

    In short, a major consumer debt bubble began in 1991 under Elder Bush and never stopped until August 2007.

    The growth was sharp as the slope of a plot of the curve shows.

    The worst action would be to prop up prices of houses.

  6. Rates are rising not due to rising inflation expectations. Rates are rising because the bond market senses too much supply issuance. Therefore, prices fall- yields rise. Intuitively, this is what should happen by the way. President Clinton could not get universal health care passed when tried mainly because the bond market sniffed out large debt sales. Hence, James Carville is much remembered for making the commment that the bond market was more powerful than the president. As it goes, I'm dumbfounded by the arrogance of the US govt that insists that it can make the stimulus package as large as it desires, amazing. Did they not teach that there is no free lunch at Harvard?
    I don't buy the whole inflation argument. MV=PY. Money is not going into the income stream as it is being destroyed by falling collateral. V is falling. Y is falling because we have already borrowed from future consumption. I have plenty of shoes already, thank you. Inflation is a long, long way from here. Wake me up when the minimum wage hits $20 an hour and I've sold my modest house for $1M. Also, rising rates on the long end will curb demand for capital.

  7. There is almost always an explanation for any move in the financial markets. And personally, I've never found one that wasn't.

    You kill the non-banks, you kill the financial markets. But commercial banks, or even bank holding companies, have not suffered from bank credit contraction since the Great Depression.

    Ken Salazar is Obama's Secretary of the Interior. This guy stopped companies from drilling oil CO. Higher trade deficits? Obama's not that smart.

  8. You kill the non-banks, (1) you kill the transactions velocity of money, (2) you starve the long-term credit markets (decrease the supply of loan funds and increase long-term interest rates),(3) you shrink aggregate demand, you shrink gdp, you raise unemployment, etc.

    The lending capacity of the commercial banks is dependent upon monetary policy, not monetary savings. But the lending capacity of financial intermediaries is dependent upon savings.


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