Debt Deal Done, Almost
Debt Deal Done, Almost – 8/2/11
Just as positive news about a resolution to the debt limit debate was about to pressure mortgage rates, very weak news from the manufacturing sector sent stocks reeling and moved the bias towards bonds again. Mortgage pricing improved by about 30 basis points for most loans, almost enough to improve interest rates by .125% for many borrowers. Yesterday afternoon, the House of Representatives passed a compromise plan that will raise the debt limit over several stages by enough to get the country into 2013 and past the 2012 elections. This will involve a second series of budget cuts yet to be negotiated which are due by November. If agreement isn’t reached by that time, a strict, broad package of cuts to defense and domestic spending would be enacted. The Senate will vote around noon today on the measure, which is expected to pass easily and make its way to the White House.
The cost of the debate has already hit the US government’s budget. The yield on short term Treasury obligations, T-bills, which come in 1-, 3- and 6-month varieties, has increased significantly in the past two weeks. CNN has inaccurately reported that cost at $1.7 billion. The actual increase since the prior auction is about $46 million. The source of CNN’s error is unclear – the total interest cost of yesterday’s $27 billion 3-month bill auction is $7.8 million, and the total cost on the $24 billion in 6-month bills auctioned is $18 million over their half-year life.
This morning, we have two minor data points. The most significant is consumer spending and incomes, reported by the Commerce Department a few minutes ago. While incomes increased by 0.1%, spending fell by 0.2%, the first decline in nearly 2 years. This has traders worried, as consumer spending is such a large part of economic activity. A major contributing factor to this is believed to be a decline in auto sales, which are expected to have fallen by 2.8% in July, and will be reported this afternoon at 2:00 PM. Contributing factors to this fall include high levels of unemployment and weak consumer confidence. Vehicle prices have also been elevated by supply disruptions that were caused by the March earthquake in Japan.
Mortgage pricing is off to a better start this morning in the wake of this weak consumer spending data. The 10-year Treasury, which closed at its lowest yield of 2011 yesterday at 2.74%, is down to 2.70% in early trading. The 3.5% Fannie Mae security, which hasn’t been liquid since November, is suddenly back in fashion, and some lenders are quoting 30-year fixed mortgage rates as low as 4.00% for borrowers willing to pay points. For homeowners who missed some of the recent refinance opportunities, this appears to be a 2nd chance. It is not likely to be long-lived though, as more economic problems are needed to sustain current low rate levels. I would recommend looking very closely at rate lock options before this Friday’s employment report.
Rate lock recommendations, by time to loan funding:
<15 days: lock
15-30 days: consider locking
30+ days: consider floating