How a one-two, Trump-Yellen punch may move interest rates

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Interest rates could try recent highs on the potent combination of a hawkish Janet Yellen and the pro-growth talk that is likely to come from Donald Trump in the next couple days.
Trump will be sworn in as 45th U.S. president on Friday, and the markets are looking for him to play up his pledges to push forward tax breaks and infrastructure spending early in his administration. He may also take actions in his first days that reduce regulation and define his commitment to the promises he's made voters. That could be seen as a near-term negative for Treasury prices and would send yields higher.
Already, bond yields were on the rise Thursday, lifted by surprising remarks from Fed Chair Yellen on Wednesday afternoon and economic reports Thursday morning showing decades-low jobless claims, an 11.3 percent jump in housing starts and a two-year high in mid-Atlantic manufacturing activity. Also a factor was the Wednesday report of a jump in headline consumer price index inflation to a more than two-year high of 2.1 percent year over year in December.

"I don't think we're going to see a huge surge in optimism again. We're not going to get another leg off of it, but I also don't think we're going to go back to where we were in October." -Tom Simons, money market economist, Jefferies

In her comments, Yellen said she expects a few rate hikes this year and that the fed funds target rate could get to 3 percent by 2019 — all in line with the Fed's forecasts. But it was Yellen's seemingly confident embrace of those targets that got the market's attention. Markets had been skeptical of the Fed forecast, and many economists had expected just two rate increases this year, not the three in the central bank's projection.
"She certainly gave the market a big push. Just looking at March probabilities, they went from an 18 percent chance (of a rate hike) to 25," said Aaron Kohli, rate strategist at BMO. "The market went from pricing slightly less than two hikes to slightly more than two hikes in 2017." He said expectations in the fed funds futures for a June rate rise went to 93 percent from 85 percent after Yellen spoke.
The 10-year Treasury yield also snapped to 2.43 percent after Yellen spoke and was as high as 2.48 percent Thursday, its highest level since Jan. 3. The two-year yield rose as well, but the curve flattened, meaning the gap between two-year yields and 10-year yields narrowed. The two-year was as high as 1.25 percent Thursday.
Yellen was scheduled to speak again and take questions Thursday evening at 8 p.m. ET at a Stanford University event. The Fed next meets Feb. 1 and while it is not expected to take action, the gathering could result in some more hawkish talk.
Kohli said the next target for the 10-year would be 2.52 percent, and then 2.60 percent.

"After the weekend and Monday, it's going to be very interesting. What happens when we get to brass tacks will be interesting for sure." -Tom Simons, money market economist, Jefferies

The bond market has been consolidating for the past several weeks after the 10-year reached a postelection high of 2.64 percent on Dec. 15. That is the level that could be tested in the near future, strategists say.
"There's a short base that will get even bolder if rates get to that level," Kohli said, adding short bets could add to the growing position sending rates higher. "I think it's very possible you get that kind of spike up. What I would suggest is as soon as that happens you might go the other way."
Money market economist Tom Simons at investment banking firm Jefferies said he doesn't see a big move in yields, but the bias should be toward higher yields, and lower prices. "I don't think we're going to see a huge surge in optimism again. We're not going to get another leg off of it, but I also don't think we're going to go back to where we were in October," he said.
"Next week we'll have two-, five- and seven-year auctions, a little bit of supply, and a light data week, so the focus is going to be on Trump, and for the most part, the first stuff that comes out of the gate is probably going to be (bond) market negative and it will be risk positive," he said.
Simons said he thought the rally in Treasurys, which drove the 10-year yield toward 2.30 percent earlier this week, was overdone.

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In the last several weeks, yields fell as investors became disillusioned with the "Trump trade" and the prospects for quick adoption of the president-elect's pro-growth agenda.
Trump did talk up expectations for a tax program or stimulus when he met with the press last week, and that absence raised flags about what he will get done early in his administration. Trump's focus on repealing Obamacare and his comments on tariffs both were concerns for the market, since the issue of altering America's health-care system is seen as a quagmire, while tariffs could spark a trade war.
"After the weekend and Monday, it's going to be very interesting. What happens when we get to brass tacks will be interesting for sure," said Simons.
Kohli said he expects Trump to focus on infrastructure spending and tax cuts. He could make a bigger splash in markets if he announces fiscal spending that can be put to work right away. Tax reform and cuts are also important, but Kohli said that's likely months away.
Strategists expect Trump to push forward quickly on initiatives in his first weeks, and markets will be disappointed if he doesn't. "If he squanders it, that's his downside," said Kohli.

Robert Bobby Darvish Platinum Lending Solutions

Mortgage Rates Just Hit a 4-Month High

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 OCTOBER 20, 2016, 11:52 AM EDT

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It’s returning to pre-Brexit levels.

Interest rates on U.S. 30-year mortgages rose to their highest levels in four months in line with rising Treasury yields on a bond market sell-off spurred by speculation about reduced stimulus from global central banks, mortgage finance agencyFreddie Mac said on Thursday.

The average 30-year mortgage rate was 3.52% in the week ended Oct. 20, Freddie Mac said in its latest mortgage rate survey. This was the highest level since the 3.56% recorded in the week of June 23.

“This is the first week in over four months that rates have risen above 3.50%. This month, mortgage rates seem to be catching up to Treasury yields and returning to pre-Brexit levels,” Sean Becketti, Freddie Mac’s chief economist, said in a statement.

Benchmark 10-year Treasury yields were at 1.74% early on Thursday, down more than 1 basis point (a tenth of a percentage point) on the day. On Monday, it reached 1.81%, which was its highest since June 2, Reuters data showed.

Record low mortgage rates beckon buyers, offer savings to refinancers

Record low mortgage interest rates mean big savings for home buyers and those refinancing a mortgage.

In January I thought I had written my last column about record-low interest rates, and just how much they can benefit home buyers and mortgage refinancers.

Like many people who figured interest rates had nowhere left to go but up, I was mistaken.

Borrowing $200,000 today for a 30-year mortgage would cost about $850 a year less, in annual payments, than borrowing that same amount in December. To put it another way, the payments on a $210,000 loan at today’s rates would be the same as the payments on a $200,000 loan secured in December. 

For homeowners who already have mortgages, rising real estate values have been increasing the amount of equity those homeowners have, making it possible for more people to refinance. Owners who were “underwater” on their loans previously may now have a chance to jump to a lower interest rate. (Equity is what the property is worth, minus the outstanding debt. When the debt’s larger than the equity a loan is underwater). 

Consider that a $200,000 mortgage loan, today, would cost $2,700 less each year than borrowing the same amount 10 years ago, during the height of the housing price bubble. The going interest rate was 5.62 during the first week of July, 2006, according to the feds who track such things.

Mortgage interest rates have now fallen to all-time lows. There are many reasons why, but the short and oversimplified version is, investors have been buying U.S. Treasury bonds as a safe haven during uncertain times — slow U.S. economic growth, negative interest rates overseas, the “Brexit” and other factors — and that pushes interest rates down.

These low interest rates will give home buyers one more opportunity to lock in long-term loan rates that are lower than they have ever been. They will give people with existing loans one more chance to refinance to record-low rates. 

How low are we talking about? For people with good to excellent credit, 740 or better, a 30-year mortgage could be had this week at a fixed interest rate of 3.375 percent. A 15-year mortgage could be had for 2.75 percent, according to the folks at Lucey Mortgage in Mount Pleasant (disclosure: they handled my mortgage refinance last month). 

Potential home-buyers in South Carolina should also remember to inquire about getting a mortgage credit certificate. For those who qualify, obtaining a mortgage credit certificate from a lender before closing on a home purchase entitles the holder to an annual federal tax credit worth up to $2,000.

For those considering refinancing, here are a few important points to remember.

The decision to refinance depends on balancing the up-front costs against the expected savings, which will vary depending on the interest rate, the loan term, the closing costs, and how long the borrower expects to stay in the house. It’s easy to go online and see not only what the loan payment would be on a mortgage, but also how a refinance could help build equity more quickly (search online for “mortgage amortization calculation” — bankrate.com has a good one).

There are costs involved with refinancing, such as title research, an appraisal, a lawyer to review closing documents, and lender fees. Costs can vary widely, so compare closing costs as well as interest rates. When I shopped for my recent refinancing, I found costs that varied by as much as $1,500.

 

Refinancing can leave you with a longer mortgage, or a shorter one. Common terms are 30 or 15 years, but 20 years is also an option. Shorter-term loans build equity faster and have lower interest rates, but have higher monthly payments. The lowest payments come with 30-year loans, but most of the money goes towards interest in the early years.

Don’t overlook the fine print. Make sure a loan allows you to pay it off at any time, with no penalty, for example.

I won’t guess what the future holds, in terms of interest rates or the real estate market. What I know is that mortgage interest rates have never been lower. There may not be a better time to refinance, but if there is, I’ll write about it.

Welcome to the Weird World of Negative Interest Rates

Central banks are doing what was once unthinkable. Will it save their economies?

It was long thought that interest rates could never go below zero. People would surely hoard cash before they paid banks for the privilege of holding it for them. But this year the European Central Bank, the Bank of Japan, and others have officially ventured into negative interest rate territory. It’s a bold experiment in economic stimulus—with big risks to global investors.

Right now there are a whopping $10 trillion in total negative-yielding sovereign bonds outstanding worldwide, according to a report by Fitch Ratings. Just as startling: 26% of the total value of J.P. Morgan’s global government bond index has a below-zero interest rate. The dynamic has even trickled into the corporate sector, where there are more than $300 million worth of negative-yielding bonds.

That has caused serious headaches for money managers, especially pension funds and insurance companies in Europe, which must fight over the increasingly scarce supply of relatively safe but positively yielding assets. The U.S. is also affected, even while the Fed maintains positive rates. According to Alex Roever, head of U.S. rate strategy at J.P. Morgan JPM -4.13% , 48% of the positive-yielding sovereign debt not held by central banks is U.S. Treasuries, meaning competition to buy U.S. debt is tougher than ever before, and demand could drive Treasury rates even lower.

All this would be manageable if the negative rates were seriously juicing the European and Japanese economies. But there’s not much evidence that it’s actually leading to more lending or higher growth. Meanwhile, signs of distortions in the system are growing, like data showing that sales of cash safes are surging in Japan, as households lose confidence in the banking system to protect their savings.

Torsten Slok of Deustche Bank Securities argues that better results would come from targeted stimulus of governments. Central banks have done what they can, he says, and “now the politicians need to do their job.”

Amid Brexit, China Gets a Dose of Economic Worry Along With More Power

As Chinese leaders tally up the losses and gains from Brexit, they likely have mixed feelings.

Beijing may be 5,000 miles away from London, but China cannot escape the shock waves of Brexit.
Prior to the June 23 referendum in the United Kingdom, Chinese leaders had maintained a studious silence on the issue because of their long-standing policy of non-interference in other countries’ domestic affairs. Now that the British voters have spoken, Beijing has to take a serious look at how Brexit will affect its economic and geopolitical interests.
Economically, Brexit is terrible news for China. Even though the UK, which had $78.5 billion in bilateral trade with China in 2015, is not among China’s top trading partners, Brexit could have an outsize impact on China’s future export performance.
If there is one message broadcast to the world by Brexit, it is the end of globalization as we know it. Political leaders in Western countries will likely roll back free trade in response to the anger and frustrations of their voters who have felt threatened, if not victimized, by globalization. As the greatest beneficiary of globalization and the world’s largest exporter, Beijing could see its future economic prospects dim as the world retreats from free trade and China’s export engine sputters.
The anticipated adverse consequences of Brexit for the UK economy will also force China to readjust its commercial strategy in Europe. In the last few years, Beijing has been wooing London with investments and potentially lucrative commercial opportunities. In his visit to the UK last year, Chinese President Xi Jinping announced deals worth $57 billion. Many Chinese companies have made the UK one of their favorite destinations of direct investment. In 2015, Chinese companies completed 22 major acquisitions in the UK. The biggest was the $9 billion purchase of a 33.5% stake by China’s General Nuclear Power Corporation in Britain’s Hinkley Point nuclear power plant.
If the UK economy deteriorates because of the uncertainty and loss of access to the EU market following Brexit, the value of Chinese investments will be impaired. Even more worrying is that should Brexit fatally damage London as a premier global financial center, China will have to shelf its plan to use London as a linchpin for the “internationalization” of the Chinese currency, the renminbi. In 2015, Beijing took several initial steps to execute this strategy. The People’s Bank of China floated 5 billion yuan-denominated bonds while the Agricultural Bank of China, a major state-owned bank, sold $1 billion in dual currency bonds in London. In the aftermath of Brexit, many major global banks may move their capital market operations out of London, which will lose its luster as a global financial hub. China needs to look for an alternative.
Nevertheless, China’s potential economic losses could be offset by some political gains from Brexit. Ideologically, Brexit is a godsend for China’s propagandists, who have lost no time in portraying the event as a convincing example of the dysfunction of democracy. Geopolitically, China could also benefit handsomely from the aftershocks of Brexit. Until roughly a decade ago, Chinese leaders viewed European integration positively since they believed that a strong Europe would be a counter-weight to American hegemony.
However, as rapid economic development has made China the world’s second-most powerful country, Chinese leaders have rethought European integration. A united and strong Europe is no longer in China’s interest because of the risk that the United States and Europe could form a strategic alliance to gang up on Beijing in the same way they contained the Soviet Union.
Subsequently, China’s European strategy has undergone a subtle but important change. It has shifted to cultivating ties with individual European countries and often pitting them against each other. So far, Beijing’s new strategy has been a resounding success. And the EU has not developed a unified response to Beijing’s “divide and conquer” tactics. Nearly every European country has its own China policy, which subordinates human rights concerns and security issues to commercial interests. It is instructive that these days no European leaders dare to meet the Dalai Lama anywhere in their countries. It is even more revealing that when China announced the establishment of the Asian Infrastructure Investment Bank (AIIB) last year, all the major European countries, led by the UK, rushed to join, apparently against the wishes of the United States.
Now with British voters opting to exit the EU, the UK will be weaker, and the EU will be even weaker. A diminished EU will not be able to stand up to China, and its internal woes will reduce its value as a strategic partner of the U.S.
As Chinese leaders tally up the potential losses and gains from Brexit, they likely have mixed feelings. If they could choose, Beijing’s pragmatists would undoubtedly prefer the certainty of the pre-Brexit world.
Minxin Pei is a professor of government at Claremont McKenna College and the author of China’s Crony Capitalism.