Interest Rates Move up Slightly

Interest ratesmoved up slightly last week.The following are excerpts from the newsletter on interest rates published by HSH Associates :

“The first week of the new year brought perhaps half a deal on resolving the “fiscal cliff”, but many hard choices and fights are yet to come. The deadline for the spending “sequester” — automatic cuts in government outlays — was kicked down the road by two months, when there will also be a battle over raising the nation’s debt limit.

Stock markets cheered the news of a deal, and if yields are any indication, money that had been parked in Treasuries to get out of the way of the cliff deadline powered out of those safe havens into stocks, lifting interest rates in their wake. Fixed mortgage rates especially track Treasury yields, and are firming at the moment. Any unwanted rise in yields and rates, of course, can now be offset by the purchasing power of the Federal Reserve, since Operation Twist ended on Monday, and the latest QE kicked in with the turn of the calendar. Some $85 billion per month of MBS and Treasuries will be bought to help keep interest rates low and stable for the foreseeable future.

Minutes from the last Federal Reserve meeting in December were released. Although the decision to begin a new round of “asset purchases” (Fed parlance for “buying more Treasury debt”) came from the meeting, there seemed little consensus on when such a program might end. The minutes suggest that a working majority of FOMC participants view the program as running throughout 2013, but others suggested that sooner might be appropriate. We remain fairly distant from the newly-instituted Fed milestones for unemployment (6.5%) and inflation (approximately 2.5%) before it will begin to change policy, so there seems little danger that the Fed’s new program of buying Treasuries will end anytime soon. That there might be an end to the program before forever did seem to surprise the markets a little and may have contributed to the selloff in Treasuries as the week came to an end.

With the economic climate fairly firm, with Federal Reserve policy now fully in place and with a tax deal done, markets are left to sort out what it all means as we move into 2013. Supportive Fed policies should help move the economy forward as we wend our way into the year, while new burdens on certain taxpayers will tend to trim the economic sails somewhat. Regardless, the economy faces plenty of headwinds. Mortgage rates are being lifted by what is arguably more optimism than is warranted at the moment, given the issues at hand, but the momentum seems to be slightly upward at present.

That is expected to continue into next week. Rates are likely to see another mild rise, numbering in perhaps a handful of basis points, but there is no reason at present to expect any huge change. “

The following are interest rate quotes from Al Hermann of American California Financial: