Bill Gross Just Bought $60-Million Worth of Bonds: Why That's a Big Deal

Keeping you updated on the Market - For the week of July 14, 2014

MARKET RECAP Bill Gross Just Bought $60-Million Worth of Bonds: Why That's a Big Deal The name Bill Gross is meaningless to most Americans. For those in finance, it's different. The name is universally known, because Bill Gross is the preeminent bond investor in the country. Specifically, Gross manages the $270-billion PIMCO Total Return Fund Institutional closed-end fund, which is the largest bond fund in the United States. Gross' actions attract attention. This past week, he attracted considerable attention when it was revealed he had poured $60 million of his personal wealth into bond funds he manages. This $60 million is on top of the $140 million he already has invested in these funds. In short, Gross in betting in a big way that low interest rates will remain low for quite a while longer. When you look at the yield performance on the 10-year U.S. Treasury note over the past six months, it's difficult to disagree with Gross' bet. Yields have actually shown more of an inclination to go lower than higher. The 10-year Treasury note is a good proxy for mortgage rates, particularly the 30-year fixed-rate loan. If you lack access to immediate mortgage information, a quick glance at the yield on the 10-year note (readily accessible at Yahoo! Finance) will give you a good idea to the direction of rates. As for the actual 30-year fixed-rate loan, it remains subdued. Bankrate.com had the 30-year loan averaging 4.31% for the past week, a slight increase over the previous week. Freddie Mac had it at 4.15%. Over the past day or so, the rate has actually drifted a little lower. Last week, we cautioned that another strong jobs report – which we got – would pressure rates to rise. Rates rose, but only by a few basis points. That interest rates remain low in the face of improving job prospects (which is indicative of an improving economy) suggests there is little impetuous for interest rates, in general, and mortgage rates, in particular, to rise. As for our prediction of 5% on the 30-year fixed-rate loan by the end of the year? Anything can happen, but it's a more distant target than it was at the beginning of the year. That said, we still have nearly six month until Dec. 31. By October, the Federal Reserve is expected to have ceased buying Treasury notes and mortgage-backed securities (MBS). What's more, the Fed will likely cease or cut back reinvesting interest and principal from maturing notes and MBS into more notes and MBS. Basically, this means that the Fed – a key factor to low mortgage rates for the past six years – will be a much smaller player as we progress through the fourth quarter. What this means to the direction of interest rates is anyone's guess. At least we know what Bill Gross' guess is – rates will remain low. But, of course, that's subject to change.

 

Economic Indicator	Release Date and Time	Consensus Estimate	Analysis
Retail Sales (June)	Tues., July 15, 8:30 am, ET	0.6% (Increase)	Moderately Important. Sales momentum points to a pick up in consumer confidence.
Mortgage Applications	Wed., July 16, 7:00 am, ET	None	Important. Purchase applications inched higher last week, but a sustained trend is still in the waiting.
Home Builder Sentiment Index (July)	Wed., July 16, 10:00 am, ET	50 Index	Important. Rising sentiment points to rising building activity in coming months.
Housing Starts (June)	Thurs., July 17, 8:30 am, ET	1 Million (Annualized)	Important. Starts remain muted, but builder sentiment suggests more activity is forthcoming.

 

Yes, Credit Is Becoming More Widely Available Tight credit is frequent lament. In a Redfin survey , 16% of respondents stated that difficulty in obtaining financing was a challenge in the second quarter of 2014 compared to 8% in the first quarter. This might be the perception, but the reality is that credit is gradually becoming easier to obtain, and that's been the case for the past two years. The Mortgage Bankers Association Mortgage Credit Availability Index continues to creep higher. In June, the index posted at 115.8 compared to 115.1 in May, which was better than the 113.8 in April. The index was set at 100 in March 2012. To be sure, the younger crowd still has some difficulty with financing. As we noted a couple weeks ago, high student- loan debt is an issue. Obviously, that drives up the debt-to-income ratio. That aside, the issues aren't materially different for younger people today compared to younger people of previous generations. When starting off in life, most of us lack assets and have to scrimp to get head. That hasn't change. The good news is housing continues to change for the better for all age groups. Price appreciation is falling back in line with historical norms. The prospect of slower price growth will bring more homes to market; there will be less incentive to hold out for a higher price. This, in turn, will further slow price growth. The bottom Line: More people will be able to afford a home, and more funding will be available to those who want to buy a home. That's good news for everyone .