Today, mortgage interest rates dropped to exceedingly low levels and I took advantage to lock 3 clients in with 5-5.25% interest rates on their home loans.Anyone out there who is looking for payment relief, should be on the phone with their banks, brokers or whomever they work with on real estate lending.There is still the possibility of ever lower rates, but today, rate renegotiation and “float down” options are the stock in trade for a saavy mortgage professional to hedge against higher rates while you are in process, but be allowed to take advantage of improvements in the market on rate drops.
I think the bond market is more or less a mystery to the average investor.For working folks, it’s not even a mystery, but something well out of sight and never even entered to mind.Ironically, it has the deepest impact from the top to the bottom of our society, in the influence it exerts over the cost of goods, services and contracts in our country.
Bond markets react in sort of an inverse fashion to the stock markets under normal circumstances, for reasons inherent to the contrast between the two.
- When stocks rise, it usually indicates (a lagging) rise in profits, incomes, gdp, etc.This rise makes likely the probability that interest rates will rise as demand to borrow rises, along with the interest rate increases that the Central Bank uses to check inflationary growth.This makes today’s bond’s less valuable, and rates move higher, since the income from the bond remains the same, but the price you pay to secure the income is lesser (more interest is earned with a lesser investment).
- When stocks fall, it usually indicates (a leading) drop in profits, incomes, gdp, etc.This rise makes likely the probability that interest rates will fall as demand to borrow receeds, along with the interest rate decreases that the Central Bank uses to stimulate economic growth.This makes today’s bond’s more valuable, and rates move lower, since the income from the bond remains the same, but the price you pay to secure the income is greater (less interest is earned with a greater investment)
Think of this movement like operating the controls of an airplane, which are usually in reverse. Pull on the stick to dive, push to climb.Generally, airplane controls all work the same, and making a control move has a predictable direction and this allows us to jet from New York to Miami in just a couple of hours.That is until the Bernard Madoff announcement this morning.Today’s activity took on an ominous tone to those of us who follow the financial markets closely:
Stocks are higher, as the automaker bailout takes center stage, and the fact that our economy is hemorraging jobs, major companies with national brands start filing for bankruptcy (Tribune Co. owner of the Chicago Cubs), or scratching around from cash from anywhere they can get it (GM, New York Times).Meanwhile, in the bond market prices there was an enourmous rush to safety as investors (pension funds, endowments, money markets, the largest institutional investors) rushed into Government debt driving the 10 year T-Bill yield to lows we haven’t seen since before JFK took office!The current yield of 2.57% for a 10 year t-bill is an ominous sign for the future direction of our economy, but the rate relief for borrowers should finally begin to ease the cash crunch enveloping our country.