This article in the WSJ last Friday indicates that President Obama and lawmakers are likely to allow income tax rates on the highest earners to increase in 2011. Currently, Bush-era tax cuts are set to expire at the end of the year. Assuming lawmakers don’t intervene this means that households will pay higher income taxes. Here is a chart with the changes:
However, Treasury Secretary Tim Geithner indicated in the article that President Obama and demo’s would like to see the tax cuts for income earners less than $250,000 (married filing jointly) extended. My guess is they’ll get their way and high income earners will end up paying significantly higher tax rates. If that happens then there will be more focus and planning on how to reduce taxable income. This will create a renewed focus on planning opportunities to shelter income.
One way this is possible is through qualified retirement plans where income can be deferred into retirement savings account and grow tax deferred. Charities will also benefit as more Americans look for ways to reduce taxes. The mortgage interest deduction will become more valuable making the “Effective Percentage Rate” even lower. If you are a household that is likely to be impacted by these tax increases it would be wise to schedule an appointment with your tax professional and/ or financial planner now so that you begin planning.
Stocks are trading higher in early morning trading, albeit on light volume. Equities received a boost from better-than-expected earnings from Exxon Mobil, encouraging news from Disney, and better than expected jobless claims figures.
On the flip side mortgage-backed bonds (MBS’s) haves started the day weaker. The main focus for interest rate watchers today is the US Treasury’s auction of $29 billion in 7-year notes. Yesterday’s 5-year auction went very well so we don’t expect any major problems.
From a technical perspective MBS’s have traded within a tight trading range for 20 of the past 22 trading days. Anytime we see this for a prolonged period we begin to get nervous about a breakout. In my opinion rates have only one direction to go at this point.
Brent Hunsberger’s column in this weekend’s Sunday Oregonian touched on the fact that the new financial overhaul bill fails in implementing the fiduciary standard of care for money managers. It also talks about the CFP(R) designation for which I just completed my exam (Brent and I were classmates at University of Portland). Here are a couple excerpts:
“The problem is that the finance industry has blurred the lines between those whose main duty is to watch out for their client’s best interest and those who make more money selling you products for a profit.”
“Traditional broker-dealers instead abide by a “suitability standard.” They have to make sure the product they sell is appropriate for a client’s investment needs and timeline. It’s the same bar that insurance sales agents must keep when selling equity indexed annuities, which are invested in securities.”
“The standard is much different for registered investment advisers and certified financial planners. They’ve pledged, through licensing or certification, to put their clients’ economic interests before their own.”
“Days before Obama signed the historic bill, I joined about 1,900 people across the nation in taking the certified financial planner certification exam. It was brutal. For nearly a year, 11 of us — all very capable students — studied together through the University of Portland for the test, learning basics about the tax code, estate law, retirement plans and time value of money. I even took six weeks off work to gear up for it. But Saturday, after 10 hours and 285 questions, we emerged drained, with little feeling for whether we’d passed. We won’t know until Labor Day. (Historically, the pass rate is 56 percent.)”
This morning’s durable goods report from the Commerce Department has added to the uncertainty of the economic outlook. The report showed a decline in durable goods orders for June when the markets were expecting a small increase. Bad news for the economy is often good news for mortgage rates.
The US Treasury will auction $37 billion in 5-year notes today. Recently 5-year note sales have not been as successful as 2-year and 7-year’s so we’ll need a keep an eye on this.
The technical outlook for interest rates is not encouraging. The safe play is to lock in.
Mortgage rates are unchanged so far today but we may see them move higher as the day goes on.
The “flight-to-quality” trade is unwinding a bit in the financial markets today. Stronger than expected earnings reported by European banks is cultivating some confidence in the equity markets. As a result we’re seeing yields move modestly higher so far today.
10 year treasury yields have broken through technical resistance while the S & P 500 pierced through it’s 200-day moving average. From a technical perspective this could mark a trend reversal which has me concerned.
Standard & Poors released the Case-Shiller Home Price Index report for May. It showed positive growth but must be taken with a grain of salt since the first-time homebuyer tax credit was still in effect.
Due to the technical trading patterns I am going to shift to a locking stance.
The Economist pointed out in the latest issue that the Financial Overhaul Bill failed to address the future of Fannie Mae and Freddie Mac. If you’ll recall the government places the two mortgage giants under conservatorship back in 2008. Since then US taxpayers have pumped $145 billion into the companies to cover losses in their loan portfolio’s. Fannie and Freddie play a critical role in the US mortgage market and I wouldn’t expect anything to change until the housing market begins to shows signs of recovery. That said, the aforementioned article lists some interesting statistics which are very telling about the boom-times of 2006-2007.
“In the first quarter they and Ginnie Mae (FHA)… guaranteed 96.5% of all newly originated mortgages…”
“Most of the losses of Fannie and Freddie result from mortgages originated before 2008. Mortgages originated in 2006 and 2007 account for 24% of Fannie’s business but 67% of its credit losses.”
“Between 2007 and 2009 the proportion of their loans with a loan-to-value ratio of 70% or less rose from 31% to 49%, while the share with a loan-to-value ratio above 95% fell from 10% to 1%…”
“At Freddie Mac 3.9% of mortgages originated in 2008 were at least 90 days delinquent at the end of March 2010. For mortgages originated in 2009, the equivalent figure was barely 0.1%…”
“…that most other countries get by with far less government backing of mortgage finance, yet their home-ownership rates are not appreciably lower and none suffered as bad a housing crash…”
Friday’s release of the European “stress tests” on European financial institutions showed that only 7 of 91 banks need additional capital. This is much better than many people had expected which we’d think would pressure rates higher. However, analysts are viewing the test stress skeptically which is why the markets haven’t reacted to it.
The US Treasury is back on the auction block this week with $104 billion in 2, 5, and 7 year notes. Click HERE to understand how government borrowing can impact mortgage rates. I fully expect demand to remain strong which will support mortgage rates.
The headline number for new home sales was strong but also misleading. The report from the Commerce Department showed that new home sales increased by 23.6% in June but that was after they revised May’s figure down by 11%.
From a technical standpoint mortgage-backed bonds are trading up against strong support. I don’t see a need to lock.
There is no US economic news being released today but the markets are waiting on pins & needles for the results of the European banks “stress test” which is scheduled to be released today. European leaders are hoping that the tests show that European banks are stronger than the markets are currently giving them credit for.
If you’ll recall European sovereign debt worries have been the primary driver of the “flight-to-quality” trade which has pushed yields lower here in the US. If this report does reveal that the European financial system is better off than the markets currently understand it to be then this would likely cause stocks to rally which would put upward pressure on rates.
This is the primary focus for the markets today. This is also very difficult to forecast so I’ll remain in a neutral position.
Stocks have started the day higher on better than expected earnings from Caterpillar, 3M, and AT&T. When stocks rally it often puts upward pressure on mortgage rates.
However, stocks are actually recovering from yesterday’s losses. In his testimony to lawmakers on Capitol Hill yesterday Fed Chairman Ben Bernanke called the economic outlook “unusually uncertain”. These aren’t exactly the reassuring words that you want to hear from your national reserve bank chairman. Needless to say stocks sold off yesterday afternoon. The Fed Chairman is back at it today providing similar testimony to the House Financial Services Committee today.
With a lack of significant economic data out today attention is focused on Capitol Hill & Wall Street.
Fed Chairman Ben Bernanke is scheduled to testify in front of Congress later today and tomorrow. With the economic outlook still bleak investors are listening to hear if the Fed has any plans to apply further stimulus. With short-term interest rates already near 0% there’s not much more they can do. Should the chairman provide any glimmer of optimism we may see rates move higher.
Stocks are trading sideways today along with mortgage-backed bonds (MBS’s). Wells Fargo reported better than expected earnings earlier today which is helping the financial sector but technology stocks are lower in response to weaker revenue from Yahoo.
All in all it looks like another sideways day for mortgage rates. On Friday, the European Central Bank is scheduled to release the results of their “bank stress test”. If the test is credible and shows that European banks remain strong this could pressure rates higher and vice versa.
However, Treasury Secretary Tim Geithner indicated in the article that President Obama and demo’s would like to see the tax cuts for income earners less than $250,000 (married filing jointly) extended. My guess is they’ll get their way and high income earners will end up paying significantly higher tax rates. If that happens then there will be more focus and planning on how to reduce taxable income. This will create a renewed focus on planning opportunities to shelter income.