Rate Watch
Economic Woes and low inflation help lower mortgage rates
Last week was another rollercoaster ride in the financial markets. The equity markets initially looked to be turning around, as the Federal Reserve together with five other central banks including the European Central Bank (ECB) moved aggressively to free up the credit markets. The central banks made available $200 billion in a new financial instrument called a 28-day Term Securities Lending Facilities (TSLF). These TSLFs will allow large financial institutions to borrow from the Fed using a variety of collateral including prime rated mortgage-backed securities. The introduction of this program was well received in the markets and helped spur some optimism in the economy. In addition, many big names, such as Standard and Poors, stated that the subprime crisis was almost over.
However, the market’s optimism was fleeting. On Friday, it became known that Bear Stearns, one of the largest investment banks and brokerage firms in the world, was close to a complete collapse. In a move not used since the 1930s, Bear Stearns received an unknown level of 28-day emergency funding through JP Morgan Chase in a deal backed by the Fed. The deal was an attempt to stave off a Bear Stearns collapse, until a deal could be made for its acquisition. Today, it was announced that JP Morgan Chase had bought Bear Stearns for $236 million, which equates to approximately $2 per share. On March 14th, Bear Stearns' closing price was $30 a share.
Also on Friday, the Consumer Price Index (CPI) showed a complete absence of inflation. Both the headline number and Core CPI, which excludes food and oil prices, came in at 0%. This is great news for the bond markets, because inflation eats into the yields of bond securities. And it was good news for the Federal Reserve, because it helps to bolster their policy of lowering interest rates to help spur economic growth.
With lower inflation and continued economic uneasiness, mortgage rates looked like a good investment to a lot of investors, as money fled from the equity markets to the bond markets. This morning, Bankrate.com’s overnight average on the 30-year fixed rate mortgage came in at 5.89 percent, down from last Monday’s 6.09 percent. The 15-year fixed rate mortgage followed. The popular product for refinances fell to 5.22 percent, down from last week’s 5.49 percent. Short-term interest rates rose. The 5-year adjustable rate mortgage came in at 5.70 percent, up from last week’s 5.35 percent.
This week will include two very important events. First, on Tuesday, the Producer Price Index (PPI) will be released. PPI measures the price changes that American producers get for their goods. The markets will be looking at this report to see if last week’s CPI report was a fluke or not. Also on Tuesday, the Federal Reserve’s FOMC Board will meet to discuss its next action. It is expected that the Fed will cut their Federal Fund rate 75 basis points. This move will hopefully spur the economy and boost the stock market a bit. However, if the stock market moves higher, then it will probably have the effect of pushing mortgage rates back up as investors move their money back into the stock market.
After these two events, the economic data will be limited and market activity will probably slow, as we approach Good Friday. The markets and most financial institutions will be closed on Friday in observance of the holiday.
posted by Vincent Biondillo @ 2:54 PM
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