Interest Rates Stabile

Interest rates stayed about the same last week .The following are excerpts from the newsletter on interest rates published by HSH Associates :

“A light calendar of new economic news gave investors time to ponder the state of affairs, allowing interest rates to wander fairly aimlessly for another week. The bump in rates may not be over, not as long as a firming economy continues to show itself, but there remain plenty of headwinds to stronger growth.

Financial panic in European markets helped to lower American interest and mortgage rates at times last year. Panic there has been largely replaced by good old fashioned recession, and a deepening one, at that. For all of 2012, the collective economies of the Eurozone contracted by 0.5%, the first time that has happened since the establishment of the common currency, with several individual economies faring far worse. Perhaps not enough to induce panic, but maybe enough to give some investors pause or foster a shift of funds back from stocks into bonds, should it persist. Should it occur, that would tend to lower interest rates here; so far, it seems to have served to temper both enthusiasm and a rise in rates.

In addition to panicked investors plowing money into safe havens, Federal Reserve policies helped interest rates to hit record lows a number of times in 2012. The Fed has recently embarked on both a Treasury and MBS buying spree to the tune of some $85 billion each month. At times, such programs can have “unintended consequences”; strong action by the Fed leads the market to believe that real economic improvement is coming sooner than later, and interest rates rise as a result. That was generally the case when QE2 was announced (see chart below), but rates began to fade when optimism about a quick recovery did. It is possible that this is the case now, as well; investors have been expressing more than mild optimism over the past five or six weeks, driving stocks higher and dragging yields up along with them.

Whether the market’s collective enthusiasm is justified or not we’ll know soon enough. Give the Eurozone trouble and only mild expansion here at best (we are coming off a -0.1% estimate for GDP for 4Q12, remember), there’s a strong possibility that mortgage rates will retrace some of their quarter-point increase in the period just ahead.

Is the economy really getting better… or worse… or doing a little of both? We are of the mind that it is a little of both. There are some important components (housing, car sales) which are doing better than they have in some time, but plenty of areas still struggling to find or maintain traction (small businesses, new hiring). There’s little available evidence to support the kind of stock market rally we’ve seen over the past month or so. It strikes us that an absence of bad news is not exactly the same as the presence of good news, but there seems to be an awful lot of hope rather than evidence driving stocks and interest rates higher at the moment. We’re not usually given to pessimism (and are often more optimistic than many) but think that some objective realism seems missing from the discussion at the moment. Times remain difficult, even if we are no longer at the emergency or crisis stage, and mortgage rates (and bond yields) seem to be at over-optimistic levels at the moment.

Mortgage rates will probably find reasons to hold at these levels for another week with a slight upward bias.”

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