Market Trends: Recapping the Rise in Mortgage Ratesby Tim Manni
Today’s issue of HSH’s Market Trends Newsletter focuses on the larger-than-expected rise in mortgage rates, discusses last week’s decision by the US to invest billions the nation’s largest banks, as well as documenting the latest economic reports and their effect on consumers:
The Federal Reserve, the Treasury, and the FDIC called nine of the nation’s most important bankers to a special meeting over last weekend, where they were asked to sign an agreement to sell the government preferred equity positions in each of the firms to help more fully capitalize them, and in turn, hopefully loosen frozen lending markets. At the same time, and in order to not spook investors, they offered to guarantee bank debt obligations for the next three years. An initial $125 billion was spent at the meeting, with another $125B available for any other banks which might voluntarily wish to participate.
The rise in rates came as markets reacted to at least two new factors. The first factor is fairly common: With a truly massive amount of sovereign debt to be unleashed into the markets — hundreds of billions of dollars here and across the globe — it’s fair to expect that supply will outstrip demand for some time to come, causing a rise in yields (see our blog entry A Bond’s Influence on Interest Rates for a simplified explanation of supply and demand dynamics as it pertains to bonds). Second, and perhaps more important, was the government’s full guarantee of bank debt for the next three years. That caused a selloff of “agency debt” (bonds backed by Fannie and Freddie), which, although also guaranteed, do have a greater level of perceived risk due to Fannie and Freddie’s difficulties as well as the uncertain nature of the marketplace. The selloff even extended to Treasuries, which are fairly low yielding at the moment. With higher yields than Treasuries available with no increase in risk, it’s little wonder investors shed other holdings in favor of bank debt.
HSH’s free weekly Market Trends Newsletter, an in-depth analysis of various financial markets of the week prior, is published every Monday. Email subscribers — receive it in your inbox by Friday night, so sign up today!