Fed Rates & 30yr Mortgage Rates NOT Correlated, Oil Drops Below $80

Q. What’s the difference between a mortgage and a Beanie Baby?
A. You can still find a buyer for a Beanie Baby.

Q: What’s the difference between a pigeon and a Wall Street investment banker?
A: Only the pigeon can still make a deposit on a brand new Porsche.

Fed & Mortgage Rates Not Correlated
The Fed lowering the overnight Fed Funds rates always garners the headlines, but as everyone in the business has seen in the last two days, any direct correlation between overnight rates and 30-yr mortgage rates is nil. When the Fed cuts the Fed Funds Rate, mortgage bonds (which is what 30-yr rates are tied to) usually sell off in the ensuing days which pushes rates up—they sell off because bonds hate inflation and rate cuts are usually perceived as inflationary. Eventually, yes, Fed Funds and mortgage rates tend to move in the same direction, but not right now. See the Rate Relationships graph below for more.

Rate Relationships -- Fed Funds and 30yr Mortgages

Wells Wins Wachovia
Wells Fargo will become the largest U.S. bank by branches with an $11.7 billion offer for Wachovia that beat a competing bid by Citigroup. Citigroup dropped the legal battle but still plans to sue Wells Fargo for $60 billion in damages, saying news of the competing bid caused its own share price to tumble. (Gee, forget that the rest of the market has been dropping.) Wells Fargo and Wachovia will stick to the terms of the all-stock deal from 10/3, which values Wachovia at about $5.43 a share.

Oil Prices Below $80, Trade Balance Shows $60b Deficit
I have lost track of the percentage decline in the various stock markets from various points of time. (Once again, the good news is that oil is at almost half of its high price – around $79/barrel – unless you own oil stocks.) Obviously the problems that the credit markets are having, that began with mortgages, are affecting sectors outside the banking industry, and today it looks like another big down day for stocks. Yesterday I listened to many “experts” say that stocks were due for a bounce, and by the end of the day they’d dropped off yet another cliff. Unfortunately the traditional flight to quality bid for treasuries has disappeared, and it appears that investors are parking money on the sidelines until the markets stabilize.

The economic news came out about as expected. The Trade Balance showed a deficit of $59.1 billion, as expected, for August, and September’s Import Prices showed a drop of 3.0% with a year-over-year increase of over 14%. What does this mean for interest rates? Nothing good, as rates are higher today. The 1-month LIBOR is still up near 4.5%, the 1-month Treasury Bill is .03%, the 10-yr Treasury is up to 3.85%, and mortgage prices are worse.

Daily Humor
Thank you David C:

Two guys are walking down a dark alley when a mugger approaches them and demands their money.

They both grudgingly pull out their wallets and begin taking out their cash.

Just then, one guy turns to the other, hands him a bill, and says, “Hey, here’s that $20 I owe you.”

(I will be on vacation next week, with internet access problematic.)