Tuesday, March 15, 2005

 

Financial aside...

I'll take a break from our usual political fare to bring up a subject near and dear to my heart lately- long term interest rates. Since I'm shopping for a home I've been following the rate on the US 10-year note with fervent interest. Most mortgage loans are tied to the 10-year in one way or another and I've been watching painfully as the 10-year has gone from 3.98% to 4.55% in about 5weeks! That's almost a 15% increase in a very short period of time. It was torture to watch as my likely future mortgage payments increased day after day.

So, today friends I bring you a quote referenced in my favorite financial newsletter and ask you to guess when it was uttered:

The fiscal history of Latin America...is replete with instances of
government default. Borrowing and default follow each other with almost
perfect regularity. When payment is resumed, the past is easily forgotten
and a new borrowing orgy ensues. This process started at the beginning of this past century and continued down to this present day. It has taught
nothing.

(The citation is in the comments section.)

What does this have to do with the 10-year? Interest rates for emerging market debt has been falling lately (the 'spread' is very narrow). This will eventually capitulate as market participants wake-up and wonder what they've been smoking that's causing them to give emering market debt such favorable interest rates vis-a-vis US debt. When this happens there will be selling of emerging market and buying of US. This will bring US rates down (b/c price goes up due to increased demand).

So, to make a long, borring story short, I am quite hopeful that we will see decreased mortgage rates in a few weeks. Cha-ching!

Bill C: It is just as likely that U.S. L-T interest rates will rise more slowly than foreign rates. I think you are right about the spread but there is no saying how this scenario will play out. I would lock in as quick as possible.

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