patrick.net

You bet that we stay right here at ZIRP for 3 years? I'll take the other side of it. I didn't say interest rates are going up to 20% tomorrow. However if they wait as much as a year to start raising them back above ZERO that would indeed be amazing. The Coyote can only hang comically in mid-air for a certain number of seconds. Bernanke already telegraphed he stands ready to raise rates, it's only a question of whether he admits it's inching up this FOMC or next. Once they have to admit US T is a declining brand the fat lady has sung. Of course it will be cast as a POSITIVE move as Bernanke is "Mission Accomplished!" versus the Great Recession.

And also relevant to mortgage rates is that the Fed is almost done with it's purchases of mortgage backed securities. That's where most of it's balance sheet expansion has been in the last year or so. Up to 1% increase in mortgage rates is what I've read.

Good discussion on Fed balance sheet a few days ago:

http://www.econbrowser.com/archives/2010/02/bernanke_on_the_3.html

Current fed balance sheet is almost 1/2 MBS now.

Timely post. I have a question for the gurus. The Chairman of the KC Fed gave an excellent speech today about what needs to be done. I hope Bernanke is listening:

http://www.kc.frb.org/speechbio/hoenigpdf/Washington.DC.Fiscal.02.16.10.pdf

But back to my question. When inflation was rampant in the late 70's, Volker raised interest rates and although it was painful for awhile it did manage to beat back inflation. Yet at the same time, folks talk about rising interest rates also being a symptom of runaway inflation. So my question, is it the simple fact that in Volker's case the Fed was front-running the rate hikes and in the runaway inflation case the market is demanding higher rates? Is it that simple? The reason I ask is that I'm trying to figure out how one would know if interest rate increases are an attempt to reign in inflation and we should just weather the storm or if higher rates are a symptom of the wheels coming off and I should snap all my cash into hard assets?

Guys,

In normal conditions the federal reserve board does not determine mortgage rates, the bond market does. If they ever stop or slow with that QE buying all of those mortgages then you oughta think about the bond market.

E-man says

I meant mortgage rate will stay low for the next 3 years 6% or less.

Why would you assume this? Does Citibank after getting free money, offer to drop your credit card to 6% out of the goodness of their heart? No. They have to keep executives in fresh Armani after all. If Fed rates go up, then mortages will go up by at least same amount if not more. Repairing all their balance sheets is an ongoing process that is soaking up every cent they can scrounge from wherever they can get it. If you do anything to cut bankster heroin they will demand a greater dose from SOMEWHERE.

Ding, Ding, Ding....we have a winner!

Banks are making money right now buying treasuries, because FED rates are so low. Think about an accounting balance sheet.....the FED is buying MBS and Treasuries, those are assets...it has to be balanced on the other side by liabilities. What are FED liabilities? More Cash...Cash to member banks! So free money to the member banks at 0%, who is buying Treasuries at 2-4.5%.

When the spigot gets shut off....less buying of MBS, less buying of treasuries, less cash to member banks, who can no longer use the cash to buy treasuries = less demand for treasuries. Less demand = lower price = higher yields.

Another interesting thing...the FED has all of these MBS on their books, issued at low interest rates. They want to sell them in 1-3 years, when interest rates are higher. What happens to the value of a debt instrument when interest rates rise? That's right, it falls. They've got a trillion in MBS right now, if interest rates rise from 5% on MBS to 7%, thats a cool 20% haircut in the value of the underlying. A 200 billion loss for the FED. That'll be page 18-C headlines three years from now when they realize that loss.

That's why they have to be purchasing them right now...Wall Street doesn't want anything to do with that. Everyone with a third tier MBA knows interest rates are going up, why woudl they want to buy debt instruments at historical lows in interest rates? They want to be borrowing money at these rates, not lending it. They are booking profits, baby!

Everyone keeps talking about inflation adjusted prices.... How fast do u expect inflation to occur in the US... Many keep saying mortgage rates could double in the next few years...(And give that as reason people should buy now.. that 2009 was the best deals around). I'm just saying if interests double quickly...homes will be unaffordable for 90% of the population that doesn't already own property. So what sector of the population are going to be driving prices up? The majority of the population who bought in CA over the last 10 years already spend
50 percent of their income on housing... There's a breaking point to home prices without wage increases.. Inflation be damned!

That seems highly speculative to me that banks would accept a narrowing of mortgage profit margins. I wouldn't bet on it. Maybe back when they were making money hand over fist selling each other securities and credit swaps it didn't seem that important. Since auction rate securities and so MANY other things have gone into the toilet, banks are reducing back to old-style modes and then some. Again I return to my example of credit card rates, where suddenly they feel the need to raise rates a LOT, add fees, and push out any customers considered dead weight.

E-man says

As recently as 3 years ago, when Fed lending rate was at 5.25%, the mortgage rate was in the 7’s%. Right now, the banks are making hand over fist due to borrow at 0% and loan to us at 5%. When Fed lending rate is going up, their profit margin got squeezed, not necessarily that mortgage rate will go up.

That was because they were able to securitize those loans into MBS or passing them on to the GSE's - they weren't loaning their own money so the Fed rate had no bearing on the mortgage rate.

The MBS market is gone so banks must either pass the loans to the GSE's or hold them on their books. Now the Fed rate plays a larger factor.

The question about the bond market is whether they've priced in an END to QE/MBS buying or if they priced in an EXTENSION of the same. Will be interesting.

So the fed is actually raising rates! Interesting. 1/4 point to .75 starting friday.

Man that came faster than I expected, I figured Ben would procrastinate until next FOMC. Bumping it by .25 today means he's in a rush to get the upward march started. Party on!

Linky:

http://www.cnbc.com/id/35465481

E-man says

Then how come banks lost so much money if they didn’t loan their own money?

Because they were out gambling in the casino and building houses of cards using fantasy structures like Auction Rate Securities, CDO, CDO-squared, synthetic CDO, and CDS. They all got high on the "New Economic Paradigm" in which boring utility banking is just so.... pedestrian, we are HIGH FINANCE INNOVATORS we are Gods Walking the Earth. Let's not even invite the Risk Manager to most of the meetings. Hey party on!

E-man says

If what you’re saying above is true. Then how come banks lost so much money if they didn’t loan their own money?

To echo Vicente, the banks started out just being the middlemen - packaging and selling MBS. But once they saw all the "great returns" their clients were getting they started keeping some of those MBS on their own books to juice their profits. We all know how that worked out for them.

Hey, he just called you moron. That means he wins.

E-man says

Ben is the right man for the job. Let him finish where he started. More power to Ben.

I thnk so too. Almost suspicious how we had the exact man for the job.

IE-man says

knewbetter says

E-man says

Ben is the right man for the job. Let him finish where he started. More power to Ben.

I thnk so too. Almost suspicious how we had the exact man for the job.

Now that you’ve mentioned. I think the Big Brother had planned this all along, and we’re just going along for the ride.

It CAN'T be a coincidence. How do you get the perfect guy in the middle of a perfect storm? How do you go from Mr. Moderate to Hellicopter Ben?

I don't think we got that lucky. I think it was planned, and in the end we'll get everything we want.

We have Iraq
We've got China by the balls
The Euro is falling.
The Dollar is rising
And an added benefit is the end of the Middle Class in this country. Pesky, pesky middle class.