Mortgage Rates and Auction Rate Securities

A lot of people have been pointing out that mortgage rates dipped to 5% after the rate cut and have now moved back into the 6%+ range. We recently had CPI numbers which showed inflation is running at over 4% year over year. Regardless of the Fed rate cuts, with inflation heading higher, it's difficult to imagine banks being willing to lend when the returns may not even match the inflation rate. The way the dollar is going, and with costs for food and energy rising as they are, it's doubtful that prices will stabilize anytime soon. We are due for more rate cuts at the next Fed meeting - (they are expected to cut another 50 bp). If rates go anywhere near 5% again, it's probably a good idea to take advantage of it ASAP. The economy and the financial environment is definitely changing for the US, and historically low interest rates may not be around much longer. It's important to remember that there was a point in time (in the 80's) when mortgage rates were 18%! Things were different back then, but it certainly illustrates the point that we've been living in a euphoric "goldilocks" economy for a while now.

Another big item on the headlines recently are the lack of a market for Auction Rate Securities (ARS). I think they are undergoing a fire sale and if you have cash around - like a lot of hedge funds, they are making a quick killing in this market. They are actually great investments, but the lack of liquidity is leading to some panic selling in secondary markets by owners who need their cash. Most of these are municipal bonds which are also TAX EXEMPT, and many are paying an extremely high interest rate at this time due to the illiquid market. I wish I had that much free cash around.