We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!
The Week Ahead in the Capital Markets - September 24, 2007
“The dust is still settling after the Fed used ‘an ax instead of a scalpel to cut rates,’ as Barron’s put it. Mortgages have been volatile. Tuesday, prices rose 0.50%; Thursday, prices fell 0.75%. The yield curve steepened. The 10-year Treasury yield rose 0.16% more than the 2-year yield. Credit spreads – especially those affecting jumbo core loans – have moved in ever so slightly. For everything other than cream-puff loans, jumbo core yields remain at very high levels relative to agencies. Mortgage-to-Treasury spreads narrowed. Mortgages currently yield 1.65% more than Treasuries, about 0.10% less than pre-Fed levels. Demand for mortgages is up; banks usually increase their purchases of mortgages when the yield curve is steep.”
The market’s early opinion is that the Fed cut is good for economic growth (stocks soared worldwide) and bad for inflation. Commodities moved to levels not seen in decades. The U.S. dollar famously reached parity with Canada’s loonie, and sank to fresh lows against the euro. Oil and gold soared to new highs.
Bill Gross thinks the Fed will ultimately take rates down to 3.75%, as the housing slump slows the economy. Whether the Fed cuts rates again, however, will rest on the economy’s performance in the months ahead. The futures market predicts a 0.25% cut before year end, and another 0.25% cut in early 2008. Opinions vary. Bear Stearns believes the Fed will not cut again, and will be forced to raise rates in 2008 as inflation pressures mount.
The lessons of history are mixed. Only twice in the last 20 years has the Fed started a rate cutting cycle with a half-point reduction, as noted by Bill Gross. Both times, the economy fell into recession and more rate cuts resulted. The last two times the Fed acted in response to financial market chaos, however, they cut rates only to reverse course and raise rates shortly thereafter. Neither the 1987 stock market crash nor the 1998 debt crisis had as much affect on the economy as anticipated, and the Fed eventually raised rates.
A University of Florida student was subdued with a taser after asking John Kerry about the 2004 election. It was the first time anyone’s been electrified at a John Kerry speech. – (Jay Leno)
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