Tuesday, February 19, 2008

Bernanke Turns Notes Into Losers as Refinancing Rises

 (Bloomberg) -- The more Federal Reserve Chairman Ben S. Bernanke cuts interest rates, the less appealing 10-year Treasuries become to investors like Doug Dachille, chief executive officer of First Principles Capital Management LLC.

Consumers taking advantage of lower borrowing costs have pushed the Mortgage Bankers Association's refinancing index to its highest level since March 2004. Ten-year notes fell 4.83 percent in April 2004 as the extra cash homeowners pocketed from replacing high-rate loans spurred bigger gains in retail sales and consumer confidence than forecast.

As then, a drop in rates may help ease the burden of consumers' monthly payments and contribute to forecasts of a rebound in the economy, diminishing the appeal of government debt. The price of the 10-year note has fallen 3.15 percent since Jan. 23, according to Merrill Lynch & Co. index data, and St. Louis Fed President William Poole said Feb. 11 that ``the best bet is that we will not have a recession.''

``There is no reason for people to bring the 10-year note yield down,'' said Dachille, 43, who manages $7 billion in assets at New York-based First Principles. Given that ``the Fed is cutting rates and the administration is providing a stimulus package, you'd expect that over the next two or three years the economy will recover.''

Policy makers slashed their target rate for overnight bank loans by 2.25 percentage points to 3 percent between Sept. 18 and Jan. 30. Bernanke indicated last week that he's prepared to cut rates further to revive the economy and encourage banks to lend.

Yields Climb

``More-expensive and less-available credit seems likely to continue to be a source of restraint,'' Bernanke told the Senate Banking Committee on Feb. 14. The Fed ``will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' he said.

Ten-year note yields rose 12 basis points, or 0.12 percentage point, to 3.77 percent last week, according to New York-based bond broker Cantor Fitzgerald LP. The price of the 3 1/2 percent security due in February 2018 fell 31/32, or $9.69 per $1,000 face amount, to 97 25/32. The yield climbed 9 basis points to 3.86 percent as of 9:19 a.m. in New York.

Yields are up from a low this year of 3.285 percent on Jan. 23, the day after the Fed reduced rates between policy meetings for the first time since the September 2001 terrorist attacks. They will rise to 3.89 percent by year-end, according to the median forecast of 65 economists in a Bloomberg News survey that puts a higher weighting on the most recent estimates.

A separate poll shows growth will likely accelerate to a 2.5 percent annual rate in the final three months of the year from 0.6 percent last quarter.

Past as Prologue

Mortgage refinancing applications soared ninefold between July 2001 and May 2003, according to the Mortgage Bankers trade group in Washington. The yield on the 10-year Treasury rose to 4.65 percent in the following 12 months from 3.37 percent.

The MBA's refinancing index surged to 5,103.60 on Jan. 25, its highest level since June 2003, from 1,620.90 in the week ended Dec. 28, 2007. The average rate on a 30-year fixed loan fell to 5.48 percent on Jan. 24, according to Freddie Mac. That means a homeowner would save $81.40 a month on every $100,000 borrowed now compared with June, when rates rose to 6.74 percent.

The rise in refinancings may be skewed by borrowers submitting multiple applications for loans as bankers tighten lending standards, according to Joseph Mason, an associate professor of finance at Drexel University in Philadelphia.

`Restricting Access'

``I don't see a housing market recovery right now,'' said Mason, 43, who predicts Treasury yields will fall as investors continue to buy the debt as a haven from losses in higher risk markets. ``People can't get a mortgage'' because ``banks are restricting access to credit,'' he said.

Declining property values are also making it harder for a growing number of homeowners to refinance. By year-end as many as 15 million households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc.

Even so, the drop in rates is helping homeowners with subprime adjustable-rate mortgages. Most of those loans are tied to the six-month London interbank offered rate, which has declined to 2.96 percent from last year's peak of 5.86 percent in September.

The decline in Libor will probably reduce scheduled increases through 2010 in subprime borrowers' payments to 8 percent on average, or $182, according to analysts at Wachovia Corp. in Charlotte, North Carolina. During August, the rise in Libor pointed to increases of 33 percent on average.
 

U.S. Stocks Rise, Led by Energy Companies; European Shares Gain

(Bloomberg) -- U.S. stocks rose, led by energy and mining companies, after oil gained for the seventh time in eight days and copper climbed to a four-month high.

Exxon Mobil Corp., the biggest U.S. fuel company, and Freeport-McMoRan Copper & Gold Inc., the world's second-largest copper producer, advanced. Wal-Mart Stores Inc., the biggest retailer, increased after fourth-quarter profit topped analysts' estimates. Rallies in raw-materials producers lifted Asia's stock benchmark to a two-week high, while European shares rebounded from earlier losses as insurers rose.

The Standard & Poor's 500 Index added 14.13 points, or 1.1 percent, to 1,364.12 as of 9:41 a.m. in New York. The Dow Jones Industrial Average rose 121.63, or 1 percent, to 12,469.84. The Nasdaq Composite Index gained 22.46, or 1 percent, to 2,344.26. The U.S. market was closed yesterday for Presidents' Day.

``The general earnings picture is quite good,'' said Lincoln Anderson, the Boston-based chief investment officer of LPL Financial Services, which helps oversee about $271 billion. ``U.S. stocks are sort of on sale.''

Fourth-quarter profit for the S&P 500's 412 members that have reported results dropped by an average 19 percent, data compiled by Bloomberg show. Excluding financial companies, earnings climbed 18 percent. The S&P 500 trades at 13.9 times its members' estimated 2008 profit, based on analysts' projections compiled by Bloomberg. Index members last traded at a valuation of less than 14 times historic earnings in 1990.

Weekly Gain

The S&P 500 rose last week for the third time in a month after the biggest jump in oil since November lifted energy producers, and earnings from consumer companies exceeded analysts' estimates.

The MSCI Asia Pacific Index gained 1.6 percent today to a two-week high as Rio Tinto Group said it's seeking a bigger price increase for its iron ore from steelmakers than the 65 percent obtained by a rival.

Europe's Dow Jones Stoxx 600 Index rose 0.9 percent after earlier declining as much as 1.3 percent. A gauge of insurers added 2.1 percent for the biggest gain among 18 industry groups.
 

Staples in 2.5 bln euro offer for Corp. Express

(Reuters) - U.S. office goods supplier Staples proposed a 7.25 euros per share offer for Dutch peer Corporate Express on Tuesday, valuing the company at around 2.5 billion euros ($3.68 billion).

Ending months of speculation about a possible bid, Staples said its all-cash offer represented a premium of around 67 percent to Corporate Express' closing price of February 4. Shares in Corporate Express jumped 33 percent on the news.

Corporate Express, one of the world's largest office products wholesalers, has been under pressure from hedge funds to put itself up for sale after losses in the United States, its key market. It was not immediately available to comment.

"Staples has high regard for the Corporate Express management team, and believes together our combined companies will create significant opportunities for all stakeholders," said Ron Sargent, Staples chairman and chief executive.