Republicans bad for interest rates

( – promoted by buhdydharma )

  I know that the GOP hasn’t taken over the House yet, but at the same time the markets are considered to be “forward looking indicators” by respected economists.

 Given that, let’s look at what has happened since the huge Republican victory in November.

  All interest rates start with Treasuries. In this case I’m looking at 10-year Treasury note yields.

In just a six weeks, interest rates on the 10-year Treasury has jumped from about 2.5% to about 3.5%. That’s a huge relative move and is usually indicative of something big happening underneath the surface of the market.

 Yields are just another name for interest rates, and are the direct opposite of prices. Thus as interest rates go up, the price of the bonds go down.

 Why are Treasuries going down? That’s hard to say, but the fact that the markets knew the Republicans were going to extend tax cuts for the wealthy, and thus increase the size of the deficits, probably factor into that.

 The massacre going on in long-dated Treasuries are spilling out onto other bond markets.

The most obvious of these are muni bonds.

 Muni bond yields are jumping while investors are selling.

 Investors cashed out a net $4.85 billion from muni funds in the seven days ended Dec. 15, up from $1.26 billion the previous week, the Investment Company Institute said in a report Wednesday.

  Investors now have pulled a net $14.2 billion from muni funds since Nov. 3, or about 2.8% of assets.

 The connection between the Republican victory and the rise in interest rates isn’t just a coincidence.

 One factor that hit the muni market in November and again early last week: Congress’ decision to end the federally subsidized Build America Bond program, which for the last two years has allowed state and local governments to issue taxable muni bonds with interest partly paid by Uncle Sam.

  With the Build America program terminating as of Dec. 31, municipalities that had been planning to borrow via those issues in 2011 may instead have to use conventional tax-free bonds. The prospect of a heavier supply of new tax-free bonds has added to concerns that muni yields could rise further.

 The hit the muni bond market is taking is a direct consequence of the Republican election victory. The GOP made a decision to end the Build America Bond program.

“We have a very firm line on BABs — we are not going to allow them to be included,” a congressional Republican aide said.

 

 So if long-dated Treasuries and muni bonds are getting sold then it will eventually hit the other major market for long-dated bonds – mortgages.

 With mortgage rates at six-month highs, refinancing appears to be dead.

  Applications for refinance loans declined 25% last week from the previous week to the lowest level since April, according to the Mortgage Bankers Association.

 The chronically weak housing market is already taking a hit from the rising mortgage rates. It will eventually force home sales to drop further.

 The rate increase means monthly payments on new mortgages will jump. Five weeks ago, a buyer with a 30-year loan would have committed to payments of $487 a month. Now it’s $526. That’s an 8% price difference – more than enough to give most shoppers pause.

 I need to add that interest rates, whether they are treasuries, munis, or mortgages are still extremely low by historical standards. In fact, they are still near all-time lows.

 However, I should also add that the economy has taken on a lot of debt in the last couple years, so a rise in interest rates, even a modest one, will have much more impact than normal.