Interest Rate Report
In spite of
ominous predictions, fixed mortgage rates fell slightly in December
and January - about a quarter of a percent.
event occurred on January 26th.
doesn't it? Well, it is sort of boring -- but
understanding the inverted yield curve may give you an edge over
your neighbors in anticipating the future.
January 26 was
the day that the yield on six-month treasury bills was 4.54%.
The yield on ten-year treasuries was 4.53%. That's unusual
and that is why January 26 is important.
are normally lower than long-term rates, not higher.
choose to put money in a certificate of deposit at your local bank.
Unlike a regular savings account where you can easily withdraw your
funds if you need them, a certificate of deposit ties up your money
for a specific period of time.
If you're tying
up your money for ten years, you would expect to earn a higher rate
than if you were only tying it up for six months - and that is the
normal situation - because longer term investments carry higher
risk. Inflation may skyrocket, we could fight a war, the bank
may go under, we could experience a middle-east oil embargo, or a
tidal wave could hit one of the coasts.
If you were to
look at "normal" interest rates on a graph, the line representing
longer term investments would be higher up on the graph than the
line representing shorter term investments. Those lines on the
graph are called "yield curves."
On January 26,
for at least a brief period of time, the "yield curves" of long and
term and short term treasury were opposite of where they should
representing short-term rates was higher on the graph than long-term
rates are higher than long-term rates, it is called an "inverted
banks borrow at low interest rates by paying you interest on savings
accounts and certificates of deposit. Then they lend that
money out on mortgages and such at higher interest rates.
That's how they make money.
Actually, it is
much more complicated than that, but you get the idea.
As the bank's
cost of borrowing gets closer to how much they can earn from
lending, they earn less profit. Since they earn less profit ,
they are less willing to lend. The money supply dries up.
So much of our economic growth is based on spending driven by
consumer and business borrowing that the economy begins to slow.
Since 1970, every
recession has been preceded by an inverted yield curve.
Of course, it
takes a while for the slowing economy to result in a recession.
The average time between inverted yield curve and recession is 40
The Fed has been
gradually raising short-term rates since June 2004. Fourteen
rate increases at .25% a pop. Short-term rates have increased
The reason they
raise rates is to prevent the economy from "overheating" so much
that inflation becomes a threat. Inflation devalues money so
that it isn't worth as much as it used to be. That
causes people to want higher interest rates on their savings and
banks to want higher returns on their loans.
short-term rates, the Fed hopes to slow the economy "just enough" to
create a "soft landing" rather than a recession and that helps to
keep interest rates low -- even though the Fed is raising interest
rates to accomplish the goal.
think the Fed tends to overshoot and raise rates "too much."
That is why
"inverted yield curves" are important. They are an economic
indicator of the economy's future performance. Of course, they
are just one indicator and very few economists are willing to
predict a recession based on just that indicator.
Which is the
reason for the old joke about the exalted corporate executive who
wishes for a one-armed economist.
economist couldn't say, "But on the other hand...."
Interest Rate Future
Although it is
quite likely that rates will float upwards at some point in the near
future, there will probably be no drastic moves to the up
side. More likely, you can expect a fairly stable situation
with small fluctuations up and down.
View Current Mortgage Rates
February's Report on Existing Home Sales and
RealEstate ABC was
picked by PC Magazine as one of 2004's...
"Top 100 Sites
You Didn't Know You Couldn't Live Without.
was one of very few real estate sites mentioned in the
November 2005 issue of "Smart Computing" magazine
discussing where you can get "buying a home"
information online. Page 59.