Curious Cat Investing and Economics Blog » fed

Commercial Real Estate Market Still Slumping

John Hunter — Mon, 10 Aug 2009 12:19:40 +0000

Fed Focusing on Real-Estate Recession as Bernanke Convenes FOMC

The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed. Property values have fallen 35 percent since October 2007, according to Moody’s Investors Service.
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Commercial property is “certainly going to be a significant drag” on growth, said Dean Maki, a former Fed researcher who is now chief U.S. economist in New York at Barclays Capital Inc., the investment-banking division of London-based Barclays Plc. “The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.”
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Any sales of mortgage-backed bonds would be the first new issues in the $700 billion U.S. market for commercial-mortgage- backed securities since it was shut down by the credit freeze in 2008. About $3 billion are in the pipeline, and the success of these sales may foster as much as $25 billion in total deals in the next six months
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Forty-seven percent of loans at the 7,000-plus smaller U.S. lenders are in commercial real estate, compared with 17 percent for the biggest banks…

First Quarter GDP 2009 down 6.1%

John Hunter — Thu, 30 Apr 2009 14:19:52 +0000

First Quarter GDP 2009 in the USA was down 6.1%. This is after a revised 6.3% drop in fourth quarter of 2008 (preliminary fourth quarter report showed a 6.2% decline). Real exports of goods and services decreased 30% in the first quarter, compared with a decrease of 23.6% in the fourth. Real imports of goods and services decreased 34.1%, compared with a decrease of 17.5%.

The personal saving rate — saving as a percentage of disposable personal income — was 4.2% in the first quarter, compared with 3.2% in the fourth quarter of 2008.

The news certainly is nothing to be happy about. But the stock markets around the world were buoyed by the Federal Reserves positive words:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing.

Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

True, those words hardly sound like great news but the markets were quite happy.

Mortgage Rates Falling on Fed Housing Focus

John Hunter — Sat, 25 Apr 2009 18:23:51 +0000

Mortgages Falling to 4% Become Bernanke Housing Focus by Brian Louis and Kathleen M. Howley

Home loans may go as low as 4 percent if the economy worsens, said Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley. Record foreclosures, falling home prices and an economy that has lost 5.1 million jobs since December 2007 will pressure Bernanke to further reduce borrowing costs. “The Fed will have to do whatever it takes,” Edelstein said. “People will buy cheaper houses at very low interest rates.”
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Conventional mortgages averaged 4.61 percent in 1951, 4 percent when backed by the Veterans Administration, and 4.25 percent by the Federal Housing Administration, according to The Postwar Residential Mortgage Market, a 1961 book written by Saul Klaman and published by Princeton University Press. Rates during the 1930s were as high as 7 percent.
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Mortgages were cheaper through most of the 1940s, ranging from about 4 percent to 5.7 percent, depending on whether the lender was a life insurer, a commercial bank or a savings and loan. In that era, most loans were for 14 years and less.
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The central bank has purchased more than $300 billion of mortgage-backed securities in 2009 through the week ended April 8, helping to cut home-loan rates to 4.82 percent last week from 5.1 percent at the start of the year, according to Freddie Mac data.
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The difference between 30-year mortgage rates and 10-year Treasury yields has narrowed to about 2.2 percent from 3.1 percent in December, which was the widest since 1986. The spread remains almost 0.7 percentage point above the average of the past decade, data compiled by Bloomberg show. Rates for 15-year mortgages are about 1.8 percent above 10-year Treasury yields, compared with an average 1.4 percent since 1999.

Excellent article with interesting historical information. I don’t believe mortgage rates will fall to 4% but differences of opinion about the future is one function of markets. Those that predict correctly can make a profit. I am thinking of refinancing a mortgage and I think I am getting close to pulling the trigger. If I was confident they would keep falling I would wait. It just seems to me the huge increase in federal debt and huge outstanding consumer debt along with very low USA saving will not keep interest rates so low. However, as I have mentioned previously, it is interesting that the Fed is directly targeting mortgage rates and possible they can push them lower. The 10 year bond yield has been increasing lately so the slight fall in mortgage rates over the last month are due to the reduced spread (that I can see decreasing – the biggest question for me is how much that spread can decrease).

April 2009 Federal Reserve Beige Book

John Hunter — Thu, 16 Apr 2009 03:28:06 +0000

Federal Reserve Beige Book highlights for April 15th. The Beige Book documents comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. The book is published eight times a year.

Manufacturing activity continued to decline in most Districts and across a wide range of industries. Several reports, however, noted that the pace of decline had slowed or that factory activity had stabilized. The Boston, Philadelphia, Richmond, Atlanta, St. Louis, Minneapolis, and San Francisco Districts cited decreases in production. The Chicago and Kansas City Districts said declines in production had slowed.
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Manufacturers’ assessments of future factory activity improved marginally over the survey period as well.
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Consumer spending remained generally weak. However, several Districts said sales rose slightly or declines moderated compared with the previous survey period.
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Home prices continued to decline in most Districts, although a few reports noted that prices were unchanged or that the pace of decline had eased. Low mortgage rates were fueling refinancing activity. Outlooks for the housing sector were generally more optimistic than in earlier surveys, with respondents hopeful that increased buyer interest would lead to better sales.
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Commercial real estate investment activity weakened further.
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Labor market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts.

Fed to Start Buying Treasury Bonds Today

John Hunter — Wed, 25 Mar 2009 21:52:39 +0000

Fed to start buying T-bonds today, hoping to move rates

The Federal Reserve will try to get long-term interest rates moving down again when the central bank today launches its first purchases of Treasury bonds. The Fed triggered a stunning drop in Treasury bond yields on March 18 when policymakers surprised Wall Street by announcing a plan to buy up to $300 billion of Treasuries over the next six months.

The yield on the 10-year T-note plunged to 2.53% on March 18 from 3% the previous day, the biggest one-day drop in decades. But since then, Treasury bond yields have been creeping higher. The 10-year T-note ended Tuesday at 2.65%. Conventional mortgage rates have flattened or inched up, although they remain historically low, in the range of 4.75% to 5%.
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On Tuesday the Treasury sold $40 billion of new two-year T-notes at a yield of 0.95%, which was lower than expected, indicating healthy investor demand. The government will auction $34 billion in five-year notes today and $24 billion in seven-year notes on Thursday. Against numbers like those in just one week, the Fed’s commitment to buy $300 billion of Treasuries over six months doesn’t look like much.
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there’s nothing to stop the Fed from suddenly announcing that its $300-billion commitment will get substantially bigger: The central bank can, in effect, print as much money as it wants to buy bonds — at least, until the day that global investors stop wanting dollars.

The original announcement caused a dramatic move but since then yields have been drifting up, every day, including today. Rates are already very low. And the huge amount of increased federal borrowing is a potential serious problem for lowering rates. And potentially an even more serious problem is foreign investors deciding the yield does not provide a good investment given the risks of inflation (I know that is how I feel). It will be interesting to see what happens with rates.

Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

John Hunter — Wed, 18 Mar 2009 21:27:52 +0000

I make a point of showing the discount rate changes by the Fed don’t translate to mortgage rate changes. I do so because many people think the discount rate does directly effect mortgage rates. But the Fed announced today, actions that actually do impact mortgage rates.

Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.

If you are looking at refinancing your mortgage now (or soon) might be a good time, rates were already very low and will be declining. And if you own long term bonds you just got a nice increase in your value (bond prices move up when interest rates move down).

Chart Shows Wild Swings in Bond Yields

John Hunter — Wed, 07 Jan 2009 15:35:53 +0000

The recent reactions to the credit and financial crisis have been dramatic. The federal funds rate has been reduced to almost 0. The increase in the spread between government bonds and corporate bonds has been dramatic also. In the last 3 months the yields on Baa corporate bonds have increased significantly while treasury bond yields have decreased significantly. Aaa bond yields have decreased but not dramatically (57 basis points), well at least not compared to the other swings.

The spread between 10 year Aaa corporate bond yields and 10 year government bonds increased to 266 basis points. In January, 2008 the spread was 159 points. The larger the spread the more people demand in interest, to compensate for the increased risk. The spread between government bonds and Baa corporate bonds increased to 604 basis points, the spread was 280 basis point in January, and 362 basis points in September.

When looking for why mortgage rates have fallen so far recently look at the 10 year treasury bond rate (which has fallen 127 basis points in the last 3 months). The rate is far more closely correlated to mortgage rates than the federal funds rate is.

Data from the federal reserve – corporate Aaa – corporate Baa – ten year treasury – fed funds

Fed Cuts Rate to 0-.25%

John Hunter — Wed, 17 Dec 2008 13:03:13 +0000

Treasury bills have been providing remarkably low yields recently. And the Fed today cut their target federal funds rate to 0-.25% (what is the fed funds rate?). With such low rates already in the market the impact of a lowered fed funds rate is really negligible. The importance is not in the rate but in the continuing message from the Fed that they will take extraordinary measures to soften the recession.

There are significant risks to this aggressive strategy (and there would be risks for acting cautiously too). But I cannot understand investing in the dollar under these conditions or in investing in long term bonds (though lower grade bonds might make some sense as a risky investment for a small portion of a portfolio as the prices have declined so much).

The current yields, truly are amazing as this graph shows. The chart shows the yield curve in Dec 2008, 2006, 2000 and 1994 based on data from the US Treasury

Improving Credit Card Regulations

John Hunter — Sat, 13 Dec 2008 21:44:12 +0000

Fed Could Remake Credit Card Regulations

The Federal Reserve on Thursday will vote on sweeping reform of the credit card industry that would ban practices such as retroactively increasing interest rates at will and charging late fees when consumers are not given a reasonable amount of time to make payments.
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The proposal would also dictate how credit card companies should apply customers’ payments that exceed the minimum required each month. When different annual percentage rates apply to different balances on the same card, banks would be prohibited from applying the entire amount to the balance with the lowest rate. Many card issuers do that so that debts with the highest interest rates linger the longest, thereby costing the consumer more.

Industry officials have lobbied against the provisions, particularly the one restricting their ability to raise interest rates. They have warned that the changes would force them to withhold credit or raise interest rates because they won’t be able to manage their risk.

“If the industry cannot change the pricing for people whose credit deteriorates then they have to treat most credit-worthy customers the same as someone whose credit has deteriorated,” Yingling said. “What that means for most people is they’ll pay a higher interest rate.”

The government has been far to slow in prohibiting the abusive practices of credit card companies.

Greenspan Says He Was Wrong On Regulation

John Hunter — Fri, 24 Oct 2008 12:33:05 +0000

Greenspan Says He Was Wrong On Regulation

Greenspan alternately defended his legacy and acknowledged mistakes. Waxman asked whether the former chairman was wrong to consistently oppose regulating the multitrillion dollar derivative market that has contributed to the financial crisis. “Well, partially,” said Greenspan, before stressing the difference between credit-default swaps and other types of derivatives.
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Even Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.
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“When bubbles cause huge problems is when they cause the financial sector to seize up,” said Frederic S. Mishkin, a Columbia University economist and, until recently, Fed governor. “The right way to deal with that kind of bubble is not with monetary policy,” but with bank supervision and other regulatory powers.
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While endorsing some expanded regulation yesterday, such as requiring the companies that combine large numbers of loans into securities to hold on to significant numbers of those securities, he also repeatedly retreated to his libertarian-leaning roots, and warned of the dangers of overreacting.
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“I made a mistake,” Greenspan said, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

The key is to strive for properly functioning markets. Unfortunately that does not mean allowing those that give large payments to politicians to foist huge risks on the economy by exempting themselves from sensible regulation. I guess some people get confused that the benefits of “free markets” are not the same as standing back and allowing powerful interests to manipulate markets and risk economies. The benefits of a free market are provided to the economy when the market is free not when large, powerful organizations are allowed to exert undue influence on markets.

I don’t really understand how people could think “free markets” are about letting special interests be free to manipulate markets. It is not really something that should be confusing to people that have thought enough to have an opinion on the benefits of free markets. The dangers of monopolies and business people conspiring to extract benefit (for those in the cartel, trust, conspiracy…) by manipulating the market was well know from the initial minds putting together capitalist theory. And the obvious method to allow the benefits of the free market to be maintained was regulation to prevent those that sought to manipulate the market for their benefit.

And the dangers of overly leveraged financial institutions should be obvious to anyone with a modicum of understanding of financial history. Then make those overly leveraged financial institutions large (too be to fail) types and you really are asking for disaster. Add in a extremely large use of debt by the public and private sectors (living beyond your means). Then throw in encouraging reckless short term thinking by providing enormous cash bonuses for paper potential profits and you really have to wonder how anyone could think this was not a perfect design to assure a financial meltdown.