The Week Ahead in the Capital Markets

June 16, 2008

Short-term interest rates shocked the market. Treasuries, ARMs, and fed-funds futures soared, a move the likes of which has not been seen since the 1980s. Inflation fears roiled the markets, fueled by comments from our Fed and the European Central Bank. Chairman Bernanke called attention to energy prices as an inflation risk – there’s a shocker – and noted that the economy was starting to grow again. Even the last Fed rate cut was not a unanimous decision.

The fed-funds futures market closed the week with 80% odds of a 0.25% rate hike in August. Odds were nil just weeks ago, and there was even talk of a rate cut. Not any more. Odds are near certain for 0.75% of increases before the end of the year. The futures market had one of the most volatile weeks in decades, and Fed funds above 3.50% are widely expected in 2009.

There is some good news. The Fed has rarely raised rates when unemployment is rising, reports Barron’s. Furthermore, higher short-term rates may not fix what ails the markets. A rising Fed funds rate is unlikely to have much effect on food or energy prices, unless the Fed raises rates enough to put the economy in a serious recession. Food and energy make up a combined 24% of CPI, and were responsible for 60% of the past year’s inflation. Food is the toughest to contain, as reserves are very low and planting is not diversified (it’s mostly corn for ethanol). Oil may pause in its ascent, but effects of the recent run-up will reverberate through the economy for many months to come. Higher rates, therefore, may not have much impact.

Mortgage rates dropped relative to Treasuries last week. Volatility usually drives mortgage rates relatively higher, but not this time. The spread closed at 2.36%, down nicely from 2.52%. The same good news cannot be said for the slope of the yield curve. It flattened to 1.23%, the flattest level seen since January.” (CMC traders price, hedge, and sell $billions of mortgages for their clients, and offer a front-line perspective on the markets.). Low expectations are the key to happiness, according to a “60 Minutes” report. If that is the case, everyone in the real estate industry must be ecstatic these days. The “60 Minutes” report was about Denmark, which recently topped the list as the happiest country in the world. It’s not that the Danes live perfect lives. They are happy because most things don’t turn out as badly as they expect. Education and childcare are free (the top tax rate is 50%), there is very little difference between incomes, and Danes are heavy drinkers. At least the U.S. has that last part right. Happiness levels are low in the U.S., as most would agree with H.L. Mencken’s quip that a happy man is “one who earns $100 a year more than his wife’s sister’s husband.”

Barack Obama took some time out from campaigning recently to go on a date with his wife. And when Hillary Clinton heard about that, she said to Bill, “Why can’t you do something like that?” So Bill asked Obama’s wife out on a date. – Jay Leno

Thanks for your business and have a good week. – Tom Millon

About Capital Markets Cooperative
Capital Markets Cooperative (CMC) provides mortgage bankers with the economies of scale and the expertise to reduce risk and maximize profit in the secondary market. Regarded as the premiere secondary marketing specialist in the industry, CMC has worked with financial institutions nationwide to break traditional barriers in capital markets and take performance and profits to the next level. To date, CMC executives have managed more than $500 billion of mortgage volume. CMC board members are Tom Millon, Jeff Harry, and Harold Koegler.

For more information about Capital Markets Cooperative, visit www.capmkts.org or call 904.543.0052 or e-mail info@capmkts.org. This e-mail is not a solicitation or investment advice of any kind. You may change your e-mail address, or if this e-mail has reached you in error, or you do not wish to continue receiving it, please let us know by replying to tmillon@capmkts.org.