Houston's Rate Sheet

Treasuries are up, Mortgage rates follow

On Tuesday, the 10-year rose as high as 4.81 percent on Tuesday, up from Monday's 4.75 percent and last week's 4.55 percent. And unlike last week, Mortgage rates have followed. Bankrate.com's overnight average was 5.86 percent this morning up 5 basis points from Monday. Inflation fears and rising global interest rates have been the main contributors to rising rates.

The inflation fears stem from the Labor Department’s Productivity report. For the first time in four years, American workers are less productive but are making more money. American productivity, a key indicator of rising standards of living, fell to an annual rate of 0.5 percent in the 4th quarter of 2005 and wages rose at a 3.3 percent pace. The report was released Tuesday morning.

For many years, the American economy did not have to worry much about inflation, because an ever efficient workforce kept it in check. As productivity rises, companies can produce more goods and services with fewer workers. Much of the jump in productivity had to do with the Internet as well as faster and faster computer processing speed. If productivity begins to stagnate or decline, it will cost companies more money to produce their goods and services. This could in turn lead to higher inflation rates. And as we’ve said many times, inflation is a bond’s arch nemesis.

On the global front, it’s the same story as last week. As posted on Monday, rising rates in Europe led to last week’s spike in US Treasuries. This week it’s Japan’s turn to get in on the action. The Bank of Japan, Japan’s version of our Fed, will meet today and tomorrow to discuss the possibility of raising short-term interest rates. This is a big decision, because borrowing money in Japan is cheap, real cheap. In fact, it is almost zero. They enacted this policy in 2001 to spur a stagnant economy. No one really knows how the markets in Japan or globally will react to a move to increase borrowing in Japan. Because of the policy, many fixed-income investors in Japan have bought their low risk bonds from Europe and America to receive a higher return than they were getting at home. The fear is that once Japan begins to raise rates those investors will bring their money back home and invest in home grown bonds. The Japanese are one of the US’s biggest purchasers of US Treasuries. If they decide to take their money and go home, it could mean less demand and higher yields in the US. The Bank will release their decision tomorrow. [click here for additional information]

Now after I’ve scare you to death, let me calm you down. Treasury yields came down a bit by the close of the market on Tuesday and remain steady today. There is still concern that they will continue to rise, however it might be that the market has adjusted sufficiently to address its fear of Japan and inflation. But I would still be cautious, and lock rates ASAP.

posted by Vincent Biondillo @ 9:19 AM