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U.S. Treasury Notes, Trends and Subprime Mortgages
See How The Dots Connect Themselves
On August 16, 2007, the fed funds rate stood at 5.25%. Also at that time, the interest rate on mortgage loans was between 5.9% and 6.4% (depending on the terms).
Today, after eight months and six reductions by the central bank, the fed funds rate is 2.25%. Three percent (or 300 basis points) in eight months' time is a large and rapid drop indeed. And, given all the media attention to this rate cut campaign, one would expect other rates to follow the almighty Fed's lead.
Except that, if one did expect this, one would be sorely mistaken.
The chart below shows the trend in mortgage rates over the past year. Two things are clear: 1) The downward trend in mortgage rates began before the Fed's rate cuts, and 2) Mortgage rates have not followed the Fed's "lead" at all in 2008. As you can well see, mortgage rates fell only slightly more than one point even when they were trending lower -- but then they reversed upward and retraced much of the decline.
So what's the big deal about all this anyway? Well, the trend in mortgage rates is absolutely critical to the still-unfolding subprime debacle. Both subprime and adjustable-rate mortgages are extremely sensitive to interest rate changes, meaning that rising rates beget higher monthly mortgage payments. I need not explain what higher payments will do to millions of homeowners who can't (or almost can't) make ends meet as it is.
Here's one other reason to see this as a big deal -- and please humor me for using another chart to help make the point. The trend in U.S. Treasury Notes almost always reflects the basic trend in mortgage rates -- specifically, the trend in U.S. Treasury Note yields. See the similarity for yourself.
The Wednesday (April 16) Short Term Update displays the full version of the chart below. STU comes with a Financial Forecast Service subscription. For more info, click here.
This chart is a stripped-down version of the Treasury Note yield chart that appears in the April 16 Short Term Update -- that complete version displays an obvious trend channel, and analysis of recent action that anticipates an opportunity in this market. I've already suggested what the larger implication of rising yields/mortgage rates will be for the economy -- consider it a possible preview of the next chapter in the subprime saga.
The complete chart and April 16 Short Term Update are online now, and available with a Financial Forecast Service subscription. Click here to learn more.
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