The vomit approach continues at the Treasury. This time their throwing up historically low mortgages on the wall... just to see if they stick. The U.S. Treasury is considering a proposal to offer new mortgages at 4.5% through Fannie Mae and Freddie Mac. That’s a point and a half lower than the silly “free market” says it should be.
Should this mortgage plan come to pass, we note that the U.S. government would be manipulating prices in almost every major market.
They are now the dominant force in commercial paper. They are propping Libor through the Fed’s multitrillion-dollar lending facilities. And through equity purchases in the TARP, they’ve inflated shares of nearly every bank engaged in the mortgage-backed security trade -- the very stocks the market hates the most.
Maybe the Treasury should take a page from Franklin Roosevelt and just announce a closing price for the S&P 500 every day. FDR reportedly fixed the dollar price of gold every morning over breakfast… that is, until he tired of the practice in 1933 and just declared the yellow metal an illicit commodity, illegal for Americans to privately own.
“You can add the bond market to that list,” notes Dan Denning. “The Fed is systematically decimating the yield on U.S. government bonds and notes. It is blitzkrieging its way through the U.S. yield curve, buying, or threatening to buy, U.S. bonds and notes in order to lower rates.
“Don't believe it? Bloomberg reports that the yield on 90-day Treasuries is 0.01%, while 10-year U.S. notes yield 2.66%. Both yields, as you can see on the chart below from the Dallas Fed, are down.
“By buying up securities with different maturities, the Fed lowers interest rates. Investors crowd in looking for safety and, of course, rising prices. But what is the Fed really up to? Is it really trying drive interest rates on government bonds so low that savers, and, more importantly, banks, begin to loan out some of their excess reserves, or, better yet, use them to buy distressed assets from each other.
“If you want to use a military metaphor, the Fed is dropping big rocks on safe houses from its EZ Money helicopter battleship. One basis point at a time, it is methodically destroying any rational reason for investment advisers to put their clients in Treasuries.
“So if you're not going to be in ultra-safe Treasuries, because they are really no better than cash, then what will you do with your money? You have to do something with it. You will spend it. Or invest it.”
Thanks to the recent Treasury-assisted plunge in mortgage rates, mortgage applications soared 112% last week compared with the week before. According to the latest from the Mortgage Bankers Association, rates fell to an average 5.4% last week, about 50 bps lower than the week before.
Judging by news emanating from the Treasury, this trend is likely to continue.
Source: Agora Financial's 5 Min. Forecast, 4 Dec 08
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