WASHINGTON (Reuters) - Policy-makers at the U.S. Federal Reserve stepped up their anti-inflation rhetoric this week after a bond market sell-off delivered a sharp reminder that they ignore investors at their peril. Extreme bond market volatility reflects uncertainty over the inflationary impact of aggressive Fed action to defeat the severe U.S. recession, and could cool the central bank toward further efforts to lift growth by buying up U.S. Treasuries. Fed Chairman Ben Bernanke tried to placate concerns that the central bank will tolerate higher prices to ensure recovery, while a couple of regional Fed bank chiefs called for an exit strategy from so-called quantitative easing. "This is a day of reckoning that the Fed would have hoped (would come) a year or two from now," said Gregory Hess, an economics professor at Claremont McKenna College in Claremont, California. "They have done big things and now they face the consequences." The Fed has more than doubled its balance sheet to $2 trillion and has promised to purchase $1.75 trillion of mortgage-related debt and longer-term U.S. Treasuries in a bid to drive down private borrowing costs and battle recession.
WASHINGTON (Reuters) - Policy-makers at the U.S. Federal Reserve stepped up their anti-inflation rhetoric this week after a bond market sell-off delivered a sharp reminder that they ignore investors at their peril.
Extreme bond market volatility reflects uncertainty over the inflationary impact of aggressive Fed action to defeat the severe U.S. recession, and could cool the central bank toward further efforts to lift growth by buying up U.S. Treasuries.
Fed Chairman Ben Bernanke tried to placate concerns that the central bank will tolerate higher prices to ensure recovery, while a couple of regional Fed bank chiefs called for an exit strategy from so-called quantitative easing.
"This is a day of reckoning that the Fed would have hoped (would come) a year or two from now," said Gregory Hess, an economics professor at Claremont McKenna College in Claremont, California. "They have done big things and now they face the consequences."
The Fed has more than doubled its balance sheet to $2 trillion and has promised to purchase $1.75 trillion of mortgage-related debt and longer-term U.S. Treasuries in a bid to drive down private borrowing costs and battle recession.
Here is the way it was supposed to work: Uncle Sam would borrow and spend trillions of dollars to save the economy and the financial system, but interest rates would stay near rock-bottom and nobody would worry about the potential side effects of all that spending -- like, say, inflation or a devalued dollar. Things aren't proceeding quite according to plan. The investors who are supposed to buy all of that new Treasury debt are rebelling, driving interest rates up. That's exactly what the housing market doesn't need. The average 30-year mortgage rate rose to a six-month high of 5.29% this week from 4.91% the previous week, according to Freddie Mac. And that was before Friday's big jump in Treasury bond yields, which are the benchmarks for many other interest rates, including home loan rates and municipal bond yields. The 10-year Treasury note yield rocketed to 3.86%, up from 3.71% on Thursday and the highest since November. -Skip- But it's the trend that's important here, and the broader implications. Even as Federal Reserve Chairman Ben S. Bernanke was on Capitol Hill this week warning that the U.S. risks borrowing its way into yet another crisis, Treasury Secretary Timothy F. Geithner was in China trying to assure the largest foreign owner of Treasury bonds that its investment was safe. Yet with every tick higher in market yields, the value of China's $770 billion in Treasury holdings erodes.
Things aren't proceeding quite according to plan. The investors who are supposed to buy all of that new Treasury debt are rebelling, driving interest rates up. That's exactly what the housing market doesn't need. The average 30-year mortgage rate rose to a six-month high of 5.29% this week from 4.91% the previous week, according to Freddie Mac.
And that was before Friday's big jump in Treasury bond yields, which are the benchmarks for many other interest rates, including home loan rates and municipal bond yields. The 10-year Treasury note yield rocketed to 3.86%, up from 3.71% on Thursday and the highest since November.
-Skip-
But it's the trend that's important here, and the broader implications. Even as Federal Reserve Chairman Ben S. Bernanke was on Capitol Hill this week warning that the U.S. risks borrowing its way into yet another crisis, Treasury Secretary Timothy F. Geithner was in China trying to assure the largest foreign owner of Treasury bonds that its investment was safe. Yet with every tick higher in market yields, the value of China's $770 billion in Treasury holdings erodes.
The Associated Press= A summary of developments in the Chapter 11 bankruptcy cases of General Motors Corp. and Chrysler LLC: GENERAL MOTORS - DAY 3 WHERE DOES IT STAND?: Wednesday marked Detroit-based GM's third day under court protection. On Monday, U.S. Judge Robert Gerber, who is overseeing the case, approved the automaker's first-day motions, allowing the company to continue its normal business operations while under bankruptcy protection. Gerber also approved GM's access to $15 billion in government-provided bankruptcy protection financing to fund its operations for the next few weeks. GM took a key step toward its downsizing Tuesday, striking a tentative deal to sell its Hummer brand to a Chinese manufacturer, while also revealing that it has potential buyers for its Saturn and Saab brands. WHAT'S NEXT?: GM's next major hearing is scheduled for June 25, when it will ask for final approval of its full $33.3 billion in debtor-in-possesion financing. A hearing on the proposed sale of the bulk of GM's assets to a new company is scheduled for June 30.
The Associated Press= A summary of developments in the Chapter 11 bankruptcy cases of General Motors Corp. and Chrysler LLC:
GENERAL MOTORS - DAY 3
WHERE DOES IT STAND?: Wednesday marked Detroit-based GM's third day under court protection.
On Monday, U.S. Judge Robert Gerber, who is overseeing the case, approved the automaker's first-day motions, allowing the company to continue its normal business operations while under bankruptcy protection.
Gerber also approved GM's access to $15 billion in government-provided bankruptcy protection financing to fund its operations for the next few weeks.
GM took a key step toward its downsizing Tuesday, striking a tentative deal to sell its Hummer brand to a Chinese manufacturer, while also revealing that it has potential buyers for its Saturn and Saab brands.
WHAT'S NEXT?: GM's next major hearing is scheduled for June 25, when it will ask for final approval of its full $33.3 billion in debtor-in-possesion financing. A hearing on the proposed sale of the bulk of GM's assets to a new company is scheduled for June 30.
The British government has secured an agreement from Icelandic authorities that they will repay the £2.3bn compensation it has paid to UK depositors in the failed Icesave bank, the Treasury said today.Under the terms of the agreement, the money paid out by the UK government will be treated as a loan to the Icelandic Financial Compensation Scheme, which will be repaid over 15 years.The deal was announced in a joint statement by the governments of Iceland, Britain and the Netherlands, which has struck a similar agreement with the authorities in Reykjavik.There will be an initial seven-year "period of grace" in which payments will be made only from the UK assets of the Icesave's parent bank, Landsbanki, which the government froze after the collapse of the Icelandic banks last October.
The British government has secured an agreement from Icelandic authorities that they will repay the £2.3bn compensation it has paid to UK depositors in the failed Icesave bank, the Treasury said today.
Under the terms of the agreement, the money paid out by the UK government will be treated as a loan to the Icelandic Financial Compensation Scheme, which will be repaid over 15 years.
The deal was announced in a joint statement by the governments of Iceland, Britain and the Netherlands, which has struck a similar agreement with the authorities in Reykjavik.
There will be an initial seven-year "period of grace" in which payments will be made only from the UK assets of the Icesave's parent bank, Landsbanki, which the government froze after the collapse of the Icelandic banks last October.
While payrolls slid by 345,000, much below the consensus guess, it was the usual hokey number, getting a lift from the wonderful birth/death model, which somehow summoned up 220,000 jobs and did so, magically, out of thin air. The harsh truth is that, using the regular payroll data, a rather formidable 14.5 million people are out of work. Moreover, if we look at the category we feel gives a more accurate picture -- the so-called U-6 tally -- which includes people too discouraged to keep looking for a job and those working part-time because they can't find full-time slots, the unemployment rate shot up to a new high of 16.4%. That means that something around 25 million folks are effectively on the dole. Ugh! ....We find ourselves clinging to the notion -- in the face of the mounting insistence in Wall Street, Washington and other seamy precincts that less bad is the equivalent of good -- that the impaired economy is still a long way from anything worthy of being called a recovery. And what's more, it will stay in that sorry state until housing, whose collapse triggered the chain reaction that threatened to all but demolish the economy, pulls itself up from the depths.
The harsh truth is that, using the regular payroll data, a rather formidable 14.5 million people are out of work. Moreover, if we look at the category we feel gives a more accurate picture -- the so-called U-6 tally -- which includes people too discouraged to keep looking for a job and those working part-time because they can't find full-time slots, the unemployment rate shot up to a new high of 16.4%. That means that something around 25 million folks are effectively on the dole. Ugh!
....We find ourselves clinging to the notion -- in the face of the mounting insistence in Wall Street, Washington and other seamy precincts that less bad is the equivalent of good -- that the impaired economy is still a long way from anything worthy of being called a recovery. And what's more, it will stay in that sorry state until housing, whose collapse triggered the chain reaction that threatened to all but demolish the economy, pulls itself up from the depths.
Abelson notes that the foreclosure moratorium by Fanny and Freddie has been lifted and that these agencies are working to save those that can be saved, but that there will be a new surge in foreclosures later this year, just what the market needs.
Tilson and Tongue don't see housing bottoming until the middle of next year, and the recovery, they suggest, will be conspicuous by its lack of vigor. One of the scarier charts in the report -- but which, we think, brings into jarring focus mortgage credit's current perilous condition -- lists how much each of the various types of loans is severely underwater. To wit: 73% of option ARMs, 50% of subprime, 45% of Alt-A and 25% of prime mortgages are in that uncomfortable category. T2 posits five waves of losses, two of which have crested, while the remaining three have yet to peak. In the first two waves, the losses of which appear largely behind us, the chief causes of distress were rooted in fraud, feckless speculation and payment shock induced by mortgage resets. The last three waves, the big losses of which have still to come, include prime loans (mostly owned or guaranteed by Fannie and Freddie); jumbo primes, second liens and home-equity lines of credit (most of these are on banks' books), and loans outside housing, notably the tidy $3.5 trillion of commercial real estate.
One of the scarier charts in the report -- but which, we think, brings into jarring focus mortgage credit's current perilous condition -- lists how much each of the various types of loans is severely underwater. To wit: 73% of option ARMs, 50% of subprime, 45% of Alt-A and 25% of prime mortgages are in that uncomfortable category.
T2 posits five waves of losses, two of which have crested, while the remaining three have yet to peak. In the first two waves, the losses of which appear largely behind us, the chief causes of distress were rooted in fraud, feckless speculation and payment shock induced by mortgage resets.
The last three waves, the big losses of which have still to come, include prime loans (mostly owned or guaranteed by Fannie and Freddie); jumbo primes, second liens and home-equity lines of credit (most of these are on banks' books), and loans outside housing, notably the tidy $3.5 trillion of commercial real estate.
AP last week (reported) that Mr. Geithner, who has a house in a posh part of Westchester County in New York, has been unable to sell it, even though he cut the price below the $1.602 million he paid for it in 2004. Since he has new digs in Washington, but has to shell out $27,000 a year in property taxes, plus the payments on $1.2 million in two mortgages on his old home, he likely figured if he sold it, at the very least he could begin to have a decent lunch instead of the baloney sandwich his missus has been preparing for him to haul to the office. He was able to rent out the five-bedroom Westchester Tudor for a mere $7,500 a month, but we're afraid, given his mortgage payments and all, he'll probably still have to make do with baloney for quite a spell. Oh, and don't be surprised if the administration unveils a new program to aid those deserving upper-end homeowners whose suffering has gone largely unremarked.
Since he has new digs in Washington, but has to shell out $27,000 a year in property taxes, plus the payments on $1.2 million in two mortgages on his old home, he likely figured if he sold it, at the very least he could begin to have a decent lunch instead of the baloney sandwich his missus has been preparing for him to haul to the office.
He was able to rent out the five-bedroom Westchester Tudor for a mere $7,500 a month, but we're afraid, given his mortgage payments and all, he'll probably still have to make do with baloney for quite a spell. Oh, and don't be surprised if the administration unveils a new program to aid those deserving upper-end homeowners whose suffering has gone largely unremarked.
