Interest Rate News from HSH Associates

Newsletter dated 3/3/06:

Fixed mortgage rates ticked just a little lower this week. Statistics for loan terms and types can be found at http://www.hsh.com/stats-index.html. There now seem to be two forces at opposing ends of the economy: housing and… everything else. Soaring prices and tighter financing conditions have crimped affordability and created a slowing in the housing and housing-related sectors of the economy, particularly the building and financing industries.Hopefully, we’re in a healthy (if painful) transition to more sustainable levels for buying, selling and pricing for homes. Both new and existing home sales reports came out this week, and both pretty much told the same tale of slowing sales, rising inventories and cooling price increases.

Treasury yields moved higher this week, especially late week, as concerns about global growth and inflation moved into center stage. It appears that interest rates are likely to rise not only in markets covered by the European Central Bank, but that Japan may even need to begin to move its interest rates higher as growth may have finally taken hold there. Higher rates abroad would lessen appetite for our debt, and the new competition for investor dollars would tend to push rates on US debt higher to remain competitive. In addition, if especially Japan is on the verge of a breakout in growth, the demand for resources which accompany such growth would tend to worsen inflation here. We’ll see how this all rolls out in the weeks ahead.

In the meanwhile, rates do seem poised to move a little higher next week. If spreads are any indication, lenders have been trying to keep from passing along the increase in underlying credit costs to the extent possible. For fixed rate mortgages, the difference between the 10-year Treasury and the average 30-year FRM was 1.97%on January 6; this week, that markup has shrunk to 1.78%, the narrowest since November.