THE BASIS POINT

WeeklyBasis 11/13/2010: Alarm Bell, Rates Up .375%

Perhaps it’s early to ring alarm bells when rates are still in the 4s, but they’re up .375% since October 7-8, which means a borrower pays $110 more per month on a $500,000 loan.

Back then, mortgage bonds hit record price levels on rumors the Fed would announce billions more in mortgage bond buying to keep prices high and yields (or rates) low. But the actual Fed news on November 3 was that they’d only buy Treasuries and no mortgages. Buy the rumor, sell the news. Cliche for good reason: it’s exactly what happened.

That and mortgage bonds got spooked this week by higher inflation in China (consumer +4.4%yr, Oct. business +5%yr, Oct.) and a U.S. debt downgrade by a top Chinese ratings firm. Here’s what they said about the Fed’s heavy bond buying to lower rates (known as Quantitative Easing): “in the long run, it will be proven to be a practice resembling drinking poison to quench thirst.”

Cynical words on the U.S. devaluing the dollar by printing money to buy bonds. But whether one agrees with the Fed or not, let’s understand their theory vs. market action: The Fed thinks low rates will trigger economic growth and then inflation. Markets will react to that inflation long before the Fed does, bonds would sell off, and rates would rise.

The next inflation readings come Tuesday and Wednesday with business and consumer inflation respectively. We also have October retail sales Monday, key manufacturing activity reports Monday and Thursday, and housing reports Tuesday and Thursday. There will also be lots more quantitative easing chatter with eight public speeches throughout next week by senior members of the Fed’s rate policy committee.

So here’s an alarm bell for you: Markets trade while economists and Fed bigwigs chatter, and the record low rate trade may have already happened.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 4.375% (4.49% APR)
FHA 30 Year: 4.25% (4.37% APR)
5/1 ARM: 3.125% (3.24% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 4.75% (4.87% APR)
FHA 30 Year: 4.5% (4.62% APR)
5/1 ARM: 4.125% (4.24% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.125% (5.24% APR)
5/1 ARM: 4.0% (4.13% APR)