Treasuries rose, pushing yields to record lows, as Federal Reserve Chairman Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.
Bonds rallied for a fourth day, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities. Bernanke said he has “obviously limited” room to lower interest rates further and may use less conventional policies, such as buying Treasury securities. The panel of economists charged with dating business cycles said the U.S. entered a recession in December 2007.
“Cash and Treasuries are king,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., who oversees $90 billion in fixed-income assets. Bernanke “wants everybody to know he has more options. Some are more effective than others.”
With it, mortgage rates have now seen levels not seen in years.
U.S. mortgage rates plunged by the most in at least seven years yesterday as a Federal Reserve pledge to buy $600 billion of debt succeeded where seven cuts in the central bank’s benchmark rate had failed.
The average rate for a 30-year fixed mortgage fell to about 5.5 percent last night after starting the day at 6.38 percent, according to an estimate from Bankrate Inc. It was the biggest one-day drop in at least seven years, said Holden Lewis, of the
North Palm Beach, Florida, publishing and research firm. Today, the rate is “bouncing around” between 5.63 percent and 5.9 percent, he said.
All of this is excellent medicine as mortgage applications increased as well.
The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending November 21, 2008. The Market Composite Index, a measure of mortgage loan application volume, was 404.4, an increase of 1.5 percent on a seasonally adjusted basis from 398.6 one week earlier. On an unadjusted basis, the Index decreased 1.0 percent compared with the previous week and was down 21.9 percent compared with the same week one year earlier.
I have said over and over that another mini refinancing boom is just about the only thing I see that can pull this economy up in the short term. Without it, we are in for a very difficult economic time.
That said, while record Treasury Yields have produced some welcomed short term economic news, they may spell some potential trouble ahead. Much of the bailout money, both already allocated and still to be allocated, hasn't been borrowed yet. Most of it still has to be borrowed and that's what Treasury bonds are for. The yield works inverse of the rate on the bonds. Right now, the Treasury bond is at a record low rate of 2.67%. In other words, we are about to dump another roughly one trillion Dollars worth of Treasury bonds on the market and we are hoping to find investors willing to accept a return of 2.67% per annum for them.
While Treasury bonds are certainly not supposed to ever yield any sort of an aggressive return, clearly there is room for significant problems here. First, we have the nightmare scenario. With the rates on Treasury bonds paying that low, there is an outside chance that they simply won't sell. In such a case, the U.S. government will begin defaulting on its debt. We may have to go into bankruptcy and our time as a superpower will end.
More likely though is that the yield on these bonds will drop significantly and pull the rate up to a more reasonable level for adding another trillion Dollars worth of debt. In such a scenario, the first big loser is anyone currently holding the bonds paying what they are paying. The second big loser is the housing market and the economy with it as all long term rates, mortgage rates included, will go up. The third big loser will be the U.S. government since they will have to pay a significantly higher interest on their debt than they are currently. (though this is a loss of their own doing) In any scenario though, we have yet to see the pernicious effects of the bailout, but clearly we are all about to find out just how devastating it is to borrow as much as our government is planning on borrowing.
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