Rate relief perspective

Several rate rises ago, back in November '05, Guambat was puzzled by the giddiness expressed by many market players saying the US market was getting a rate relief rally because rates would soon stop at 4.5%. But Guambat gets puzzled easily. The puzzlement then was how could there be a rate relief rally when long term rates had not to that time actually risen?

And once again we are told the market is rallying on a rate relief theme as rates climb past 5%. And, finally, the long end has caught up to most of the rate rises, so - maybe a relief rally makes sense?

Sure, why not? Well, consider:

Barry Ritholtz provides a few reasons to be a bit churlish.

There is a disconnect here; We've previously observed that once the Fed finishes, markets do not perform particularly well. I have yet to see a convincing reason not to see that pattern continue.

Just in case you found these four prior discussions wanting (!), here are two more analyses along similar lines to digest. [You'll have to read his post to discover the details. It's not punishment; it saves me from making a hash of his data.]

And the long end rises will now begin to bite the consumers, those cows that Wall Street keeps happy to feed on.

According to this Bloomberg report,

About $200 billion of adjustable-rate mortgages will be reset this year, according to Calabasas, California-based Countrywide.

Next year, $1 trillion of floating-rate loans are due to reset.

A $200,000 one-year adjustable-rate mortgage made in 2004 costs about $1,157 a month now, $230 more than the original charge. A 30-year loan originated at the same time cost $1,214 a month. Payments on a new 30-year mortgage are about $1,276 a month.

The monthly payment on floating-rate mortgages may increase again as all 63 economists surveyed by Bloomberg expect the Fed to raise its benchmark by a quarter point to 5 percent on May 10.

The average rate on a one-year ARM increased to 5.67 percent on May 5 from 3.76 percent before the Fed started lifting borrowing costs in June 2004. The average rate for a 30-year, fixed-rate loan rose to 6.59 percent from 6.12 percent during the same period, according to Freddie Mac, the second-largest source of mortgage financing.

Mortgages will increase 9 percent this year, down from more than 10 percent annually from 2002 to 2005, Fannie Mae said in a report in April. At that rate, residential mortgage debt will exceed $10 trillion next year.

Lenders profited from the U.S. housing boom, collecting fees from homeowners who refinanced debt as the Fed reduced rates to a 45-year low of 1 percent in 2003. Mortgage rates dropped to records and house prices soared.

Also see these Guambat posts about inflation.