Market pressuring Fed to lowering rates even more
From Financial Times, Monday, August 20:
The dramatic decline in the yield on short-term Treasury bills on Monday further strengthened market expectations that the Federal Reserve will soon embark on an aggressive series of interest rate cuts. By the close of trading the market was pricing in roughly one-and-a-half quarter-point cuts by the Fed’s next scheduled policy meeting on September 18.
And more bad news Monday:
- Investors fled money market funds, considered among the safest instruments, on concern that the funds, which hold $2.5 trillion, have invested in risky collateralized-debt obligations backed by subprime mortgage loans.
- Sentinel Management Group, a US money manager at the centre of recent market turmoil, was on Monday charged with fraud and misuse of client assets by the SEC. The problems at Sentinel came as a particular shock to US and global markets as it was thought to be investing in relatively safe assets on behalf of hedge funds and futures brokers.
- Greenpoint Mortgage, a subsidiary of Capital One, shuttered.
(And Tuesday starts out shabby) European stocks, US Futures drop - ``Volatility and risk are back,'' said Franck Hennin, a fund manager at Richelieu Finance in Paris, which oversees $5 billion in assets. ``We're in a crisis of confidence. We're having trouble estimating the damage for financial companies.'
Tuesday 9:00pdt update: U.S. Stocks Rise on Rate-Cut Speculation After Dodd Comments
Where is all the cash coming from to buy up short term Treasury bills? From investor redemptions in hedge funds and other seemingly safe vehicles now perceived as risky (Monday's news is not reassuring!) ... the cash is being parked in Treasuries for safekeeping. Redemptions will continue over the next few weeks lowering short term Treasury yields even further.
Bankrate.com has a nifty rate trend tool that compares historical mortgage rates with economic indicators.
Yesterday, I posited that a new window of lower mortgage rates will soon follow the drop in interest rates now being reflected in the current sea change of asset reallocation. Note 30-year fixed mortgages are still just 1.25% off their all time lows of the decade and they're dropping down again as the Fed is pressured to act (read here). When this lower rate window develops by mid-September and spurs a wave of home buyers, the transactions will look like pre-subprime 1997 - lenders have already tightened credit qualification to limit the exuberance characteristic of the no-down stated income loan era. I expect the market will begin to look orderly.And more investment cash from all those redemptions from hedge funds may find their way into real estate, which is starting to look like a good investment these days.
Related articles:
- Home buyers, start your engines
- Timeline of the Global Credit Crunch
- Why the stock markets keep falling
- Explaining the Global Credit Crunch
Nice site.. Wishing you a Happy Sunday! Keep the articles coming!
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