THANKS FRANK! Who’s Frank, and why are we thanking him? A few clues. Remember that positive news for the economy tends to be bad for bonds, and can cause mortgage interest rates to worsen. Last week brought many strong reports on the economy, including the best Producer Price Index reported since March. Typically these positive signals should have caused mortgage interest rates to worsen…so let’s get back to our friend Frank. Mr. Frank Raines, the CEO of Fannie Mae, was seen in Malaysia last week courting major investors from the region as to their interest in Fannie Mae mortgage bonds. Raines was on record as stating his mission to drum up demand for mortgage bonds was going “very well”, and Thursday’s increase in foreign buying of bonds may have been a consequence of his trip. Based on very strong investment in mortgage bonds, last week brought an .125% to .25% improvement in mortgage interest rates.
Besides Frank, anyone else we should thank for the improvement in the bond market and therefore mortgage interest rates last week? Perhaps the bond traders “covering their shorts”. Many traders believed the favorable economic data of the week would push bonds lower. When the reaction was not as bad as traders expected, those who were betting on the bond going down were wrong, and needed to then purchase mortgage bonds to cover their sold position. This action further benefited mortgage interest rates. So, while we are giving “thanks”, let’s include the short covering traders as well! But how will this “short rally” affect mortgage rates in the week ahead? Read on for this week’s forecast…
SPEAKING OF SHORTS, DON’T GET CAUGHT WITH YOURS DOWN THIS COMING TAX SEASON. BE SURE TO READ THIS WEEKS MORTGAGE MARKET VIEW FOR THREE STEPS YOU CAN TAKE RIGHT NOW TO TRIM YOUR 2003 TAX BILL!
Forecast For The Week
Market rallies that are due to foreign investment and short covering can be swift and significant, but beware the other side of the coin. Once the short covering stops, mortgage bonds will need to remain at these levels on their own merit, and serious volatility can erupt very quickly. Interestingly enough, the last time bonds touched the present trading levels, they proceeded to fall dramatically over the next several weeks, causing mortgage rates to worsen. Overall, mortgage interest rates are not expected to make any major moves this week, but if the plethora of strong economic reports continue, it wouldn’t be surprising to see rates stabilize and perhaps even nudge back up a few ticks in response.
Chart: Fannie Mae 5.5% Mortgage Bond (Friday Nov. 14, 2003)
The Mortgage Market View…
They say money talks – but when tax time comes, all it seems to say is “Goodbye”. But this year did bring a few income tax cuts, including the removal of the “marriage penalty”. In fact, there is now a “marriage bonus” for couples with uneven incomes. A trip to the Chapel of Love in Vegas may be a little extreme as a tax saving measure, so here are three quick ideas you can act on right away to trim your 2003 tax bill.
Shop for your small business. The IRS now allows you to “expense” up to $100,000 of new or used business equipment, including computer software. The previous limit was just $25,000, so small business benefit big from this change. Expensing gives an immediate 100% write off, rather than having to depreciate over several years. For purchases you do not expense, the new tax law also boosted the first year “bonus” depreciation from 30% to 50%.
Keep it in the family. If you have assets such as stocks, bonds or mutual funds that you have been intending to liquidate, consider gifting it to a child age 14 or older. The child can then sell the asset and pay only a 5% capital gains tax, as opposed to the 15% normally paid. Be cautious with this tactic, as gifts are non-revocable.
Offset gains. If you have investments that need to be sold, either to balance allocation or simply to take some money “off the table”, don’t let the tax ramifications stop you. The capital gains tax on profits has been reduced from 20 to 15%, but better yet, you can offset the gains with previous year’s losses that may still be on your return. If you have previous losses, offsetting these losses with profits from investments sold could effectively produce tax-free gains.
As with any tax tip, be sure to consult your qualified tax advisor.
The Week's Economic Indicator Calendar
The movers and shakers to watch this week are Tuesday’s Consumer Price Index (CPI) Report and Thursday’s Initial Jobless Claims and Philadelphia Fed reports. Remember that in general, weaker than expected numbers would indicate the economy is not improving as quickly as expected, and could cause mortgage rates to improve. Positive numbers would indicate a strengthening economic climate, and could cause mortgage rates to gradually climb higher. With the recent Producer Price Index Report showing some early signs of inflation, the CPI Report will be closely watched. If the report shows that inflation fears are beginning to arise, the Fed may have to cut the chatter about disinflation, which may push rates a bit higher.
For the week of November 17th - November 21st, 2003
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