Econimic news

From the WSJ By Frederic Miskin

When the Federal Open Market Committee meets this Tuesday and Wednesday, the Federal Reserve will face a serious dilemma. Since the last committee meeting six weeks ago, the 10-year U.S. Treasury yield has risen by around 70 basis points (0.70%), with the result that the interest rate on 30-year mortgages has risen by a similar amount. The rise in long-term interest rates is particularly worrisome, because it has the potential to choke off economic recovery and lead to further deterioration in the housing market. That would put an already weakened financial system under stress.
Does the situation call for the Fed to expand its purchases of Treasury bonds to lower long-term interest rates? To answer this question, we need to look at why long-term interest rates have risen. Here, there is good news and bad news. One cause of the rise in long-term rates is the more positive economic news of the past couple of months, particularly in financial markets. The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future. To fund these budget deficits, the Treasury has to sell large quantities of bonds both now and in the future, causing bond prices to fall and interest rates to rise.
The increased supply of Treasury debt puts pressure on the Fed to buy it up. Although an expansion of Treasury bond purchases by the Fed would have the benefit of lowering long-term interest rates temporarily to stimulate the economy, in the current environment it could be dangerous for two reasons. First, it might suggest that the Fed is willing to monetize Treasury debt. The Fed does not, and should not, want to make it easy for the Treasury to sell its debt and thereby be an enabler of fiscal irresponsibility. Second, if the Fed loses its credibility to resist pressures to monetize the debt it could cause inflation expectations to shift upward, thereby leading to a serious problem down the road. The Fed is boxed in. The slack in the economy that is likely to persist for a very long time suggests the need for stimulative monetary policy to lower long-term interest rates through the purchase of Treasuries. The fiscal situation argues against this policy action, because it would weaken the Fed's inflation-fighting credibility. How can the Fed get out of the box and pursue the expansionary monetary policy that is needed right now? The answer is that the Obama administration and Congress have to get serious about long-run fiscal sustainability. Large budget deficits naturally occur during severe recessions when tax revenue undergoes a substantial decline. In addition, fiscal stimulus to promote economic recovery when the economy is in a severe recession is a sensible prescription. However, the failure to take steps to get future budgets under control is a recipe for disaster. Not only does it make it difficult for the Fed to take the actions needed to promote economic recovery, but it may even make the fiscal stimulus package less effective. After all, if you know that the government is issuing a lot of debt that has to be paid back someday you can expect to pay much higher taxes in the future. With the prospect of higher taxes, you will be less likely to spend today. How can the Obama administration and Congress help the Fed do its job and help the fiscal stimulus package work? It needs to address exploding spending on entitlements -- Social Security and particularly Medicare -- which are causing future deficit projections to be so bleak. One possibility is to establish a nonpartisan commission on entitlement reform, along the lines of the National Commission on Social Security in the early 1980s. It produced recommendations that for a time helped put Social Security on a more solid footing. Another is taxing health-care benefits as part of any package to reform health care. Taxing health-care benefits would not only generate large amounts of revenue. It would also increase the incentive for people to lower the costs of their health care. There are surely many other ways to promote more fiscal responsibility. The Fed can assist this process. It could indicate that implementing measures that would promote fiscal sustainability will be rewarded with Federal Reserve actions to bring long-term Treasury rates down. Deals like this have been successfully made in the past. In the current extremely difficult economic environment, we surely need such a deal now.
Wall Street is concerned that the Federal Reserve's plan to jump-start growth by buying assets and keeping interest rates low could lead to an inflationary bubble. Treasury bond yields are increasing, which has fostered a rise in long-term interest rates; and the jump could make borrowing costs more expensive for both homeowners and buyers and hurt the economic recovery. When central bank officials convene this week for their policy making session, they may use their post-meeting statement to squash speculation that they're gearing up to raise interest rates this year. In light of that, investors and analysts say it is critical for the Fed to spell out how it will cut its balance sheet and keep inflation from ballooning.

Mountain View has been ranked by Forbes Magazine

**Mountain View has been ranked by Forbes Magazine as the FOURTH best city (population under 100,000) to live in and the BEST in the Bay Area –Source: Mountain View VOICE, May 22, 2009

Something for everyone!

Mountain View offers a plethora of activities to enjoy. Some of the “Goings-On” include an abundance of concerts to choose from at the outdoor Shoreline Amphitheater, dance and theater productions at the beautiful Center for Performing Arts and many other cultural attractions.

After dining at one of the many diverse restaurants located within walking distance of each other, enjoy a walk or hike in one of the 32 well-groomed parks. This city has developed a reputation for being one of the finest recreation destinations in the Bay Area. Shoreline Park is a 750-acre area that is home to a wildlife sanctuary, with many trails and an 18-hole championship golf course.

Sundays are a special treat to Mt. View residents with the ever popular Farmer’s Market located next to the CalTrain and Light Rail station. Afterwards stroll down Castro Street and enjoy coffee from one of the several coffeehouses, window shop specialty shops and bookstores.

Mountain View topped the list in terms of venture capital activity and enjoys a strong and diversified local economy. Companies such as Google, Intuit, Microsoft, Symantec and start-ups such as Ooyala, are just a few headquartered here, Residents commute an average of 20 minutes to work which is considered low for the Bay Area.

Our neighborhoods are vibrant and designed to fit every lifestyle with quality public schools, and a centrally located library.

I take pride in being a Mountain View resident. If you would like more information about this great city please feel free me at 408-205-5302 or visit my website at www.markjongsma.com

Charming Campbell Ranch Home, Open Sat & Sun

Mortgage Update

The volatility continues as Mortgage Bonds opened lower this morning, but then erased their losses. Since May 21, the 4.5% coupon has shed 556 basis points, pushing home loan rates to the highest level since the Federal Reserve announced its Mortgage Backed Security purchase plan back in November.
Fears of future inflation and added supply have been the culprits behind the recent sell-off.
In other news, Retail Sales were inline with estimates and marked the biggest rebound for Retail Sales in 4 months. Also, while Initial Jobless Claims were below estimates, continuing claims rose to 6.82 million, which is another new record.
A day that we are not getting an "alert to lock."
Bonds look to be trying to improve this morning. I will let you know if this changes.

Mortgage News

Mortgage Bonds finally mustered up some nice gains yesterday, but those gains were erased in early trading this morning.
In the news, US exports fell to the lowest level in almost 3 years, as the US Balance of Trade widened in April for the second month. However, US exports should improve a bit in May after the US Dollar recently sank against foreign currencies, which makes US goods cheaper and more attractive to buy.
Currently, Mortgage Bonds are trading in a very wide range. Bonds just took a dropped 31 bps. We have an alert to lock rates this AM.
If anything changes, I will let you know.
Have a great day!