Interest Rate Update – Supply and Demand
by Tom on May 24, 2007
in Uncategorized
Hi,
Here’s the “commentary” that goes with my weekly interest rate update. If you’d like to receive it along with the rates by e-mail, let me know.
Thanks!
Tom
Here’s the latest on interest rates. They have ticked up a little this week. Why? Well, I think it’s frankly all about supply and demand. Not the supply and demand of mortgages, but the supply and demand of money. Let me explain:
1. There’s a LOT of money bouncing around the financial markets looking for the opportunity to earn a better return.
2. When the stock market is down, more of that money flows into the bond market.
3. When the stock market is up, more money flows into the stock market and out of the bond market.
4. If you’ve watched the news lately, you know the stock market is UP big time, with many record highs so far this year.
5. So, money is flowing out of the bond market and into the stock market.
6. As less people want to buy bonds, the price that bonds go for drops.
7. As the price of bonds drops, the interest rate goes up.
8. As interest rates on bonds go up, so go mortgage rates.
And there you have it, the 8 step link between a record high on the DOW and mortgage rates.
I’m going to go out on a limb a little here and talk about the stock market. I’m a firm believer that over the long haul, the financial markets are basically rational. That means that they react, over the long haul, to the appropriate economic conditions. So what’s up with the stock market right now? It’s climbing to all time highs as if the overall economy was chugging along just wonderfully. It’s like there’s a disconnect between the real economic conditions that are out there and the stock market. Corporate earnings have been mediocre at best, and a number of economic reports have been less than spectacular. However the markets keep going up. It makes me nervous and I think we could see a substantial “jolt” back into reality. If so, see steps 1 through 8 above, but factor the money flow in the other direction.
One of the things that has kept pressure on the bond market and mortgage rates is the jobs reports. Throughout all of the “struggles” in the housing market, the auto industry, and others, the jobs reports have shown that job growth was remarkably strong. Well, there was an article in the Wall Street Journal and I’m starting to hear from others that with the housing downturn, the Bureau of Labor Statistics might have missed a substantial number of jobs that have been lost in the mortgage and construction trades. If that pans out to be true, we could see some substantial revisions (downward) to the employment reports which could take some pressure off inflation which could encourage the Fed to lower rates sooner rather than later. Stay tuned on that one.
