Deflationary Times and Interest Rates

Last Monday we talked about the Treasury considering investing capital into the larger banks. Sure enough the formal plan was announced Tuesday, and we believe it will have more credit-creating incentives than any of the other moves being contemplated. Make no mistake about it, these efforts are to help a broken financial market. It is going to take some time to get back into full swing, but we are seeing some normalizing of US Treasuries and LIBOR rates already appearing. Mortgage-backed securities (MBS) are still not in full demand and pricing is higher (rates along with it) than the current deflationary environment would indicate. We will be watching for both economic indicators on inflation and impacts on supply and demand of MBS for the time being.

The housing news surprised the pundits last week, coming in at low numbers not seen since the 70s. This would normally do a couple of things to the markets, lessen concern for inflation (good for bonds) and spook money out of the stock market and into bonds (good for bonds.) If you look at the chart below, the last few days of trading were just that, good for bonds. That is continuing on today. I expect that with the current economic trends in favor of bonds, the interest rate driver will largely be demand and money flows. At some point there should be a return of normal demand for MBS that will have an added favorable effect on interest rates. As we stand, rates are still quite reasonable.

This week has limited economic news but there should be much market and political news. We’ll keep a close watch, helping you and your clients seize the moment and get the best available shot at mortgage rates. Let’s talk about who you think we could help. Make it a great week!