San Francisco Real Estate - Residential

IMPORTANT BOND MARKET UPDATE

Hi everyone!

Wanted to provide you all a quick bond market update today in light of the fact that a) I didn't get a chance to present at yesterday's meeting as it went long and b) the market is moving against us significantly today.

As you may remember, a few weeks ago I mentioned at the Wednesday meeting that the bond market had ticked below the 200-day moving average and that was most likely an indication that rates would get worse before they get better. However, even I did not anticipate rates moving against us to the degree that they have in the past week or so with today being the worst day we have seen in almost a year. Treasuries are selling off sharply (meaning rates going up) and the 10-year treasury yield is above 5% for the first time since August 2006. We are now down 75 basis points on the day - that is a huge move for one day.

So what is causing this major selloff? There are multiple things going on in global markets that are causing it...

1. The first factor is global growth and inflation as illustrated by both the recent rate hikes and strong data reports in several countries...most recently an unexpected rate hike in New Zealand. Yes...the economy in New Zealand effects our mortgage rates. Why? Because there is competition for foreign investment in the bond market and with rate hikes overseas, the foreign markets become more attractive as their debt instruments become higher-yielding. Therefore, investors take money out of the US bond market to buy overseas, our bond market drops causing the domestic bond rates to go up.
2. Another factor I believe is leading to the selloff in bonds is expectations of a fed rate cut that has been priced into the market to some degree starting earlier this year based on widespread perception that the economy would weaken enough to persuade the Fed to cut rates. However, this hasn't happened, and a number of data reports and other indicators of late have pointed to unexpected resilience in the economy causing inflation fears to raise their head again.
3. Lastly, with the 10-year ticking over 5% this morning (now at approximately 5.12%), the bond market took out a significant emotional threshold which caused the selling volume to escalate.

So the question is...what can we expect now?

Certainly, we are seeing lenders reprice today (and some lenders are already on their 2nd reprice today) for the worse...they, like some investors, are running a bit scared of this action today. Technically, the bond market has taken out some significant levels of support and that has investors and lenders nervous. That being said, the bond market is extremely oversold right now and if we can get any sense of stability, I believe we will be able to recover much of this selloff in pretty short order. I will keep you posted if anything significant changes in the market but for right now, we are definitely on Mr. Toad's Wild Ride (a Disneyland reference for those not familiar!) so hold on to your hats!

Please let us know if you have any questions!

- Stacey Fleece
Senior Loan Consultant
Princeton Capital
415.229.1228
StaceyFleece@princetoncap.com

posted by SFResidence.com @ 10:41 AM