A wild story still unfolding, most of it overseas.
The result here at home: mortgage rates near 3.75% and the lows of the year — and the tilt in chart-pattern witch-doctoring to lower yet. Rates will rise only on substantial good news, somewhere.
The only domestic economic data of note: starts of new homes and sales of existing ones are flat.
Mortgage rates approaching 70-year low
It is the dead of winter, after all, but mortgage rates are within an inch of the 70-year low. Rising rates was the leading (false) explanation for flat sales last year; now it is the absence of for-sale inventory.
If we have demand but poor inventory, we would build, and weāre not. Save deconstruction of housing reality for another day.
New wave of refinancing
There is some upward pressure on rates from the new wave of refis, which feel to markets like net-new sales of mortgage backed securities (MBS). Previous owners of MBS based on 4.50%-plus mortgages do not necessarily leap to buy ones paying most of one percent less.
However, what else can they buy? And that mechanism is in play all over the world.
Doug Behnfield of UBS, a fine bond-investment manager, dredged up this old New York trading term: the āGazinta.ā A colleague or client proposes selling a position, and old-timers reply, āYeah, whatās ya Gazinta?ā Translation: Gazinta is the Brooklyn-mangled shorthand for āgo-in-to.ā You can sell, but unless you want to sit in cash, what will you buy? Selling is always easier than investing.
The US 10-year Treasury trades 1.81% Friday morning, a fundamentally ridiculous Gazinta with the Fed intending to raise its rate by summer.
The yen and the euro crashing vs the dollar
However, German 10s trade 0.321%, and Japanās 0.238% — and both the yen and the euro are crashing versus the dollar, which makes rich the dollar-equivalent of our ridiculous Treasurys.
The bond-market Gazinta is driven by that currency Gazinta (patience, please — there is and end to this). The European Central Bank (ECB) Thursday announced its long-awaited quantitative easing (QE). It will fund the purchase of 60 billion eurosā worth of euro-zone securities each month way into 2016. The āfundingā will be provided to individual nation central banks pro rata to GDP, which means Germany, needing no help at all will get the same pro rata share as Italy, near its black hole. As public policy goes, pathetic.
QE1 here, announced November 2008 was nothing short of miraculous. Its focus was MBS, whose yields had risen from a normal 1.80% over Treasurys to double that, and QE1 righted a panicked and wrecked market, helping housing to bottom.
QE2 18 months later pushed down long-term rates. QE3 in 2012… the Fed knew in months was a diminishing return, ineffective, and backed out of it as fast as dignity would allow.Ā The ECBās QE will be less effective than QE3 here, possibly undetectable. The primary problem: euro-zone rates are already essentially at zero. Out to five years, many sovereign bonds there trade at below-zero yield. Thus the ECB will pour out a trillion euro cash in exchange for a trillion in cash.
Few bonds to buy
Another ECB QE problem: few bonds to buy. US bank assets are only about 75% of GDP, and the rest of our immense credit supply is securitized — MBS about $7 trillion by themselves. Europe (like Japan) is bank-centric. French bank assets are four times its GDP. European MBS markets are trivial.
The end of the Gazinta chain: the primary effect of ECB policy is to drive down the euro. A lower euro will make euro exports more competitive, and make imports more expensive, which should generate euro inflation. However, unlikely to work because the world is in a full-scale currency war, beggar-ALL-thy-neighbors.
Last week the Swiss were forced to drop a euro peg, let the SFr rise and accept the economic damage.Ā This week both Denmark and Canada were forced to act. Denmark desperately and foolishly trying to hold the kroner down to the level of the falling euro, cut its overnight cost of money to minus .35%. Canada is hurt by oil, and cut its overnight rate from 1.00% to .75%.
Two near-term mysteries: when will China have to drop its dollar-peg, to stay competitive with Japan and Europe? And when will the US feel the effect of everybody devaluing versus the dollar? Meanwhile, US mortgages are the Gazinta!
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10-year U.S. Treasury note
The Euro fell to an 11-year low against the dollar
Recovery, eh? Accelerating, eh?
Existing Ā home sales
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