Tag: $700 billion

Rate Update September 29, 2008

Posted on by Evan in Rate Update


Rates are modestly better this morning but let’s remember that for the past week rates have been pushed higher.

There is a lot to talk about this morning in the financial markets. Ordinarily inflation expectations are the primary factor that drives mortgage rates. The fact that this morning’s Personal Consumption Expenditure (PCE) report indicated worse than expected inflation (year-over year Core PCE was the highest since 1995) would usually be a cautionary sign that rates should move higher. However, worries over the condition of the global financial system are hurting stocks and helping bonds today. Watch today’s you tube video for details.

Topic’s discussed in video:

-Bailout agreement

-Citigroup’s government-brokered acquisition of Wachovia

-Credit markets & LIBOR

Current Outlook: floating

Cost of bailout put in perspective

Posted on by Evan in Credit Crisis

Brett Arends wrote this terrific article for the WSJ.com analyzing the true cost of the $700 billion bailout.  Based on his analysis the true cost of the bailout is equal to, “one-third of 1% of our annual gross domestic product.”

I strongly believe we need to get this bailout done.  Here is a link to my rate update today where I also try to put the cost of the bailout in perspective.

In my view the costs of not doing the bailout far outweigh the cost of doing it.

Rate update September 26, 2008

Posted on by Evan in Rate Update

Pricing on rates is moderately worse again this morning.

In terms of mortgage rates we still believe that over the course of the next couple weeks we’ll see mortgage rates move lower. Working in favor of mortgage rates are technical trading patterns and the spread between 30-year treasury bonds (4.35%) and 30-year mortgage-backed bonds (5.30%) which are both backed by the US government. We expect these two rates to converge over time.

The big news of the day is the failure of Washington Mutual and the question as to whether or not the Federal bailout plan will pass. Watch today’s you tube video for commentary.

Cost of $700 billion in perspective:

Current US National debt: aprox. $9.8 trillion

US National Debt with $700 billion: $10.5 trillion

Current US GDP: aprox. $14 trillion

% of national debt (with $700 billion) to GDP: 75%

Other instances/ countries of developed countries having debt-to-GDP ratios that are higher:

US: % of national debt to GDP in 1940s: 110%

Italy: % of debt to GDP (2003): 106%

Japan: % of debt to GDP (2003): 154%

Canada: % of debt to GDP (2003): 77%

Current Outlook: near-term neutral, long-term floating

Will bailout lead to weaker US Dollar?

Posted on by Evan in Economics & Interest Rates

Vitaliy Katsenelson wrote a good article for Forbes today about the impact that a $700 billion bailout would have on confidence in the US dollar.

Excerpt:

“In the past, we did not really have to worry about the financial strength of the U.S. government. Today, that financial strength has been tested. I doubt it will happen but I would not be surprised if Microsoft’s new AAA-rated bonds will have a lower yield than US Treasuries.“

In other words, if the US government commits to a $700 billion bailout plan investors know that they will have to effectively print money to foot the bill.  Increasing the money supply would lead to higher inflation and therefore higher interest rates.

Although unlikely could you imagine if US debt carried higher rates of interest than AAA corporate debt?

However, he goes on to mention:

“On the bright side, the bailout may or may not end up being a bailout. If the government were to buy loans for 30 cents on the dollar that are worth at least 30 cents, then the government is providing liquidity–the cost to taxpayers is zero. Not necessarily a bailout.”

Hopefully the latter is the case.