Tuesday, December 27, 2005

Lot of crazy interest rate talk today in the news

Forbes even tried to do their own abortition of their last press release. Check this out...

Sneak Peek 2006
Stephane Fitch On Real Estate
12.27.05, 6:00 AM

The Big Trend
The most important factor in real estate in 2006 will be higher mortgage rates. Think like a bond trader: The Treasury yield curve is virtually flat now; the two-year Treasury offers a 4.25% yield and the ten-year pays 4.5%. So unless we are in for a recession (which almost nobody believes), figure we are in for a selloff in ten-year bonds and, as a result, higher mortgage rates. The effect of that would be strongest on the frothy residential market. But institutions may also tire of the skinny yields being paid by real estate investment trust.

Lets give the clown some credit. He is trying to explain thinterestst rate and why it flatten. Heck he even went on to say Toll Brothers is a good company. I mean he said WE BELIEVE Toll brothers is a good company. Of course just the other day WE BELIEVE Toll Brothers will tank.

Here is the deal with the treasury notes. Now I know the United States is the center of the universe and we all been told the man behind the curtain makes thing happen with the cost of borrowing money. But instead of being Americans, let us pretend we are German.

Once upon a time the US dollar was falling in comparison to the Euro. This means if a German were to spend his Euro's on US Treasury Bills and hold these bills for a few years before trading them. By the time he traded them and exchange the Treasury bills back to Euros he lost a few Euros during the exchange. Now if the US treasury bills were trading at a rate of return of 8% whle the Euro treasury bills were trading at a rate of 5%. The extra 3% he made holding the Treasury bills might justify buying American 10 year notes.

But what if as in the case of the last year The US dollar gain strength of 9% over the Euro Imagine he could buy Use Treasury bills for 4.5% hold them for a year. Sell them with his 4.5% profit and then make another 9% on the exchange back to Euros. The man just made 13.5% on one of the worlds safest investments.

The first year this happens. The lucky Europeans say 'Holy shit, I'm rich.' Now look at the above chart. Keep in mind it was not that long ago - say when the Taxing Democrats were in power. That the chart would have been at 1.15. With that in mind and the likelihood of a Taxing Democrat coming back into power during an economic boom. Is it reasonable to assume the momentum of the dollar will last?

I'm not asking if the momentum will last. Just asking if you think Japan, Germany, France, England, China, India, Saudi Arabia, Australia, and so on will be dumping their US Treasuries, or BUYING?

If they are buying, the buying pressure at the auctions will drop the rate of return on the 10 year note. It's simple supply and demand. As the dollar rally proves real to more and more countries. The justification to buy the US Treasury notes at a lower and lower rate of return becomes more and more sound to these countries.

This is what is happening. Nothing more.

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