Friday, May 30, 2014

10 Year Bond (Fact or Fiction) - This one is playing out real time - TBD

The 10 year Bond is one of the primary indicators Mortgage Professionals use to guess rate direction and analysts use for Bank Non-Interest Income potential.

Normally the 10 year bond yield would be higher with the Stock market at all-time highs, high consumer confidence, rising housing prices, and rising household income.
I read posts from originators in the industry cheering a lower bond yield and the prospects of lower mortgage rates.  This baffles me in that the originators doing this are missing the bigger picture.  Rates are already at historical lows and a further reduction in bond yields (higher bond prices) could cripple the foundation that supports their client’s confidence to buy.  Consumers buy homes for various reasons.  The most common is security for their family, a sense of belonging to a community, better schools for their children, and the benefits an investment in a home has over renting.  There is a saying “people forget rates but never forget poor service”.
As an industry and as a consumer, we should all appreciate the favorable rate environment QE1, QE2, and QE3 provided and understand a healthy economy is more important than short term gratification.
So why is the 10 year bond yield falling?  Is it an aberration or is something more insidious brewing?

Ø  Short Covering as the month is ending and quarter drawing to an end?

Ø  Flight to safety for foreign entities?

Ø  Veil Government monetary policy contrary to public taper?

 The consequences of a falling 10 year bond yield?

Ø  Given the reduced channels of income available to Banks, without spreads provided from deposits to overnight and mid-term investing, recovery could be in question and could facilitate a conservative credit posture thus slowing growth

Ø  If banks miss earnings due to Non-Interest Income, the market could interpret this as a slowing economy initiating an overreaction by the overall market creating a severe correction and consumer pull back

Ø  Investors could extrapolate bank earnings to other healthy sectors forcing a broad sell off and a reversion to 2009 mind sets

Ø  A broad sell off greater than 20% could impact consumer / business confidence enough to severely impact jobs and the current economic recovery pushing us closer to the next recession or worse

Recessions occur roughly every 7 years and the US is 5+ years out of the last one with the Stock Market at all-time highs.  As a business person and consumer, I prefer the growth periods versus the contraction periods.  The current economic growth can continue with a more stable base provided by a steeper yield curve and bonds coupled to historical relationships.


In my opinion all outcomes are possibilities; however, the Federal Reserve will ensure banks remain healthy and thus the 10 year yields will go north due to basic economic relationships or monetary intervention.  We should all hope there is a keen eye on this subject.
Cal Haupt
Chief Executive Officer
Southeast Mortgage of Georgia, Inc.

No comments: