Dear Refi
Clients:
If we’re going
forward with your refinance, I highly recommend locking immediately!
Rates are
climbing, of course, but it seems as if they'll keep rising more sharply than
usual until their movements get the respect that some investors feel they
deserve.
Shorter-term
rates remain fairly flat, but as soon as the term to maturity exceeds one year,
rates begin a marked upward trend that seems to refuse to stop. It is as if the
market were somehow doing all it can to get the message to us. "This is
the time; it's not a rehearsal that will soon turn south again."
The 2-year
Treasury security has edged up to 0.29%--then the yield curve begins to take
off. At five years, it bolts to a full 1%. At 10 years, it has made its way up
to 2.05%. And at 30 years, it stands (as this is being written) at 3.21%.
This is a
strong advance in rates that starts at the longer end and tapers off at the
shorter end. That can confuse borrowers into thinking the longer-term rates
will gradually decline back toward the shorter-term rates, regaining the luster
of historically lower rates. That's very unlikely, though.
Longer-term
rates may be the harbinger of the future, as investors deal with the fact that
the inevitable direction for longer-term rates (which have been kept low by
Federal Reserve programs) is up. Clearly, if the props from the Fed are eased
and/or removed, and rates at the longer term are allowed to go where they would
be without the constant support from the Fed, they will rise. As the market
digests this fact, rates anticipate the inevitable upward moves by starting to
rise.
What would
bring rates back down? A shock to the relative calm in the credit markets could
frighten investors back into the safe haven of Treasury securities, one
suspects. As we have noticed for dozens of months, bad news sends investors
into Treasury securities, and that takes rates lower. Rates decline because
investors believe that lower rates will help the economy through a tough time.
But if the economy looks good, rates will rise. And if rates on new Treasury
securities rise, then the value of older Treasury securities bearing lower
interest yields falls.
With virtually
nothing being done about the Sequester, and government budgetary problems
flapping in the wind, it is reasonable to keep in mind that we could have
adequate bad news to take rates lower again, and make investors all over the
world both frightened and grumpy.
But the
underlying trend here is for rates to rise. Remember that an investors'
holdings in bonds lose value -- he or she loses money -- if rates rise. That
being so, more and more investors are currently unlikely to invest in bonds or
bond-related investments. So we see odd things like crude oil futures becoming
attractive to investors who want a play on a stronger economy in the near- to
mid-term future.
The movements
of bonds are rather complex and counter-intuitive, and I'm amazingly capable of
saying bonds will lose value when in fact what I mean to say is that they may
gain in value but pull out your machete and hack your way through the jungle.
What you will find is a market whose longer-term rates, the rates the Fed has
for months most strongly and effectively influenced, are undergoing a cyclical
change.
Soon, we may be
reading articles in the financial press about how higher rates will flatten the
real estate recovery. They are very unlikely to, though because part and parcel
of the process is a growing awareness that superbly low rates could slip away
unused if we don't get off the stick and make use of them.
It's time.
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