These Markets (and investors) are Dazed and Confused

I seldom watch CNBC because all they do is make up shit to talk about–no substance just a lot of time to fill I guess.

As I flipped by the channel today they were discussing whether the 10 year treasury had ‘peaked’. What the hell are they talking about? Peaked for the month of February maybe, but talk of peaking interest rates is pure silliness. Sure the numbers move around but you would have to be a fool to believe that rates have peaked. We know that in March short rates are going to get bumped 1/4% higher. We also know that the Fed still claims they are tapering $20 billion a month right now and that the treasury has to raise about $75 billion in new money for the balance of 2018–how the hell are rates going to fall when $95 billion a month is needed through May and then more than that going forward. It is no wonder investors are continually confused.

Today the 10 year treasury did fall down to 2.84% before closing at 2.87%. Soft new home sales numbers were the culprit of the day–maybe this is what set off the silly talk on CNBC. Analysts seemed surprised about the soft numbers–but as I have watched prices of new construction rise it is no surprise to me. In rural Minnesota you have to spend $350,000 to $400,000 to build a modest house on 5 acres and in town the bare bones starter house is $225,000. While this doesn’t seem like a steep price to folks in California in this area where most folks make $20/hour it is a bunch of money–no wonder sales are soft.

Today we didn’t make any purchases in the model portfolios as we have been working on getting the floating rates and fixed to floating rate preferred table completed. Maybe we will make a buy tomorrow–we will be buying a higher yielding mREIT preferred for the the High Yield Portfolio which will give a new sector representation in the portfolio.

I want to watch Fed chair Powell as he testifies before the House and Senate Tuesday and Thursday to see if his tone is any different from Yellen. Certainly this is as important as any economic data that will be released this week. He could easily send rates to the low 2.80’s or back over 2.90% – we shall see.

3 thoughts on “These Markets (and investors) are Dazed and Confused”

  1. Hi Tim – Totally agree on housing and interest rates are once again an issue. A nationwide median new build at $350,000 with a 10% down payment required a “minimum” annual income of ~$45,000 ($21.63/hr) to qualify for a mortgage last year at 3.5%. At today‚Äôs 4.5% rate, the same home requires a “minimum” annual income of ~$50,000 ($24.04/hr). We might initially consider that paltry, though with the surge (in the millions) of the $18 to $20/hr labor force, it’s actually a big deal. Let’s turn to crazy California. Income (~$150,000) that could qualify for a $1,000,000 mortgage at 3.5% can now only qualify for $886,200 at the current 4.5% interest rate. That’s ~12% drop in purchasing power in just a few months. Double take right? Coming off of these ultra low rates, even a 1% increase represents a huge loss in purchasing power. If it actually happens, the unwind will come with many consequences.

    1. I dont know how people stretch it so thin on a mortgage payment. I still live under old dated expression…. No mortgage above 2x annual income.

  2. The Fed is in a pickle. The U.S., and probably all of the globe, have little ability to grow 4, 5 or 6% which is what is needed. Housing is a mess–the ‘haves’ are ok but the ‘have nots’ are basically screwed. Housing prices are going to fall quite a bit if the 10 year goes to 4% (which it won’t–I don’t think).

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