Thursday, September 20, 2007

What Hath the Fed Wrought (Rot)?

With the stock market off in its own little world we thought we would try to stay here in the real world and continue our exploration of the current situation. The main thought for today is the real effect of the 50 bps drop in short term rates.

In the last two days, we are seeing immediately what the other markets think. The stock market doesn’t seem too concerned about any of these particular issues, for now. Let’s start with the bond market, Treasury style. On Tuesday morning before the decision on rates, the ten year Treasury yielded right around 4.46%. Then the Fed unleashed its news. The rate at Thursday’s close just two days after the rate CUT is 4.70%.

Wait a minute, what did that say? Did that say the ten year Treasury rate went up 24 bps after the Fed lowered the funds rate by 50 bps? It sure looks like it. What happened to the 30 year rate? Well, the rate just prior to…well, you know… was 4.70% and Thursday it closed at 4.97% for a 27 bps jump. If we take a look at the short end of the curve, rates did drop a little and thereby creating a steeper yield curve.

We think the steeper yield curve sort of creates a new demand for ARM type mortgages again??? With the current ARM rate very close to the 30 year rate, there really is no very good reason to get an ARM, option or otherwise. True, for those who have ARM resets coming up, there might be some relief. That’s not to say there is a lot of relief from the one purchased about two years ago when rates were near zero but there is some relief.

We still think the rate cut is primarily for those Wall Street companies that may have gotten a little away from perfect fundamentals of their business. Now, you can see that the normal citizen of this country will not benefit much in the way of a good fixed rate mortgage since the basis for those rates jumped about a quarter of a point since the Fed dropped its rate by half a point. Nice.

Meanwhile over in the oil pit, the price has jumped after the rate decision this week, too. Going back what seems like just a few days ago, oh that’s because it was, the price of oil was just over $80 on Tuesday morning and on Thursday it closed at near $84 a barrel. The problem here is not just oil it’s…

The dollar did not like the rate cut and dropped considerably with the full markets believing that the dollar has no bottom. Since oil is sold mostly in dollars, the price of oil compared to the dollar, well, it went up. We can only say that this rate cut must have been very important. The implications as we have mentioned here this evening had to known before the decision was made. You tell us, what are they so scared of???

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