Interest Rate Insights Articles by Alan Fine

Short-Term Improvements vs. Major Trend of Rates

afine@c2rate.com (Alan Fine) — Tue, 11 Mar 2025 21:58:28 GMT

Short-Term Improvements vs. Major Trend of Rates

In mid-January 2025, highs were reached in interest rate markets as 10-year note yields peaked at 4.77%, and mortgage rates followed suit at 7.25%.

There has been much uncertainty in the market, generated by Trump’s implementation of tariffs; Department of Government Efficiency cuts to government employment and agencies; and questionable threats to our friendly country relationships with Canada, Mexico, and Ukraine. The stock market gave back earlier gains for the year, and investors sought safety by moving into the Treasury and mortgage markets, which caused this easing phase of interest rates by the first of March 2025. The 10-year note yield (rate) dropped to 4.20%, and the 30-year mortgage rate hit 6.70%.

Technical View

Charts are useful tools for technical analysis when analyzing markets because they create a picture summarizing all the world factors and events influencing values. See the chart below.

The 10-year T-note futures price chart shows that T-note prices move inversely to rates. The note values have risen to test a significant price downtrend in place for over three years. The chart indicates that note prices tested the downtrend and failed to break through. This is an indication that the downtrend remains intact, meaning interest rates are still in a long-term uptrend. A key technical rule is that trends persist until proven otherwise.

Summary

The 10-year T-note price chart remains in a downtrend, translating to higher yields and interest rates.

Trumping the Fed & Interest Rates

Tue, 25 Feb 2025 23:29:54 GMT

Trumping the Fed & Interest Rates

President Trump is exerting pressure on Federal Reserve Chair Jerome Powell to aggressively cut the Fed's policy interest rate. During a Teleconference with the World Economic Forum in Davos on January 23, 2025, he boldly stated, "I'll demand that interest rates drop immediately, and likewise, they should be dropping all over the word."

Fed, an Independent Government Agency

First, the Federal Reserve is an independent entity, a central bank, free from political influences. The Fed reports to Congress and doesn't take orders from the executive branch or the president.

He is doing so despite the fact that the Fed is yet to achieve its 2 percent inflation target. He is also doing so despite the upward inflationary pressure that his proposed economic policy mix of sharp import tariff increases, massive tax cuts, and the deportation expense of undocumented immigrants will exert on inflation.

A key objective for Presidents and Federal officials is to maintain the people's confidence. When it comes to interest rates, they function as a free market. Investors who purchase US Treasury bonds, mortgage securities, and debt instruments set the free market aspect of interest rates. Anything undermining the investors' confidence in the US Treasury can be detrimental to their values, translating to higher rates.

Furthermore, there is a false perception that the Fed controls the direction of interest rates. The Fed controls its short-term rates, which are the Fed Funds and the Discount rates, but they do not set Bond Yields/Rates, which are all free market rates.

The media often confuses the public by projecting the Federal Reserve (Fed) as the determining factor in the direction of interest rates. However, interest rates are influenced by the supply and demand for bonds & debt markets as a free market.

Case in point. After the recent Rate Fed Rate Cut occurred on September 19, 2024. We saw the longer-term Treasuries & Mortgages move up right away. The 10-year Treasury Bond Yield/Rate (benchmark) and Mortgage Rate immediately increased after the Sep 2024 Fed rate cut for approximately 2 months. The intermediate and long-term Treasuries ended up much higher after the Fed cut. See Chart below.

10-Year Treasure Note Yields (Rate)

Conclusion

The 10-year Treasury Note Yield(Rate) , the benchmark for long-term interest rates, led to an uptrend in interest rates in the fall of 2021. It's been an established trend. Since then, the fundamental factors of rising US debt have increased, and interest expenses have catapulted upward.

It appears that Trump's interest rate demand for lower rates will directly conflict with the Fed's Independence.

Fed Chairman Powel stated that his position of the Fed remains independent and that "it's not permitted under the law, "referring to Trump's interference in any way with interest rates. Furthermore, the Market will not side with anyone and will march to its own beat, and it has already ignored the lowering in the Fed Fund Rate.

Opinion

There doesn't appear to be anything good that will come out of this with Trump's hands-on influence on interest rates. And will likely weaken the Confidence of Treasury Investors.

Alan Fine

Mortgage Advisor/Technical Analyst

Licensed CA, MI NMLS# 236398 CA.BRE# 00840325

C2 Financial Corp - Resource to 100+ Mortgage Lenders

858 755-0575 Afine@C2Rate.com

Flight to Insecurity in the Face of a Fed Rate Cut

Sat, 03 Aug 2024 22:18:24 GMT

Flight to Insecurity in the Face of a Fed Rate Cut

A False Sense of Security

At the start of August, a series of negative economic reports led to a sharp downturn in stock prices, resulting in a temporary shift of funds towards the Treasury and debt markets. On August 2, the employment report for July revealed a surprising drop in the number of jobs in the US: 114,000 instead of the anticipated 185,000. Furthermore, a downturn in global stock markets, primarily influenced by the fall of the Japanese currency and equity markets, prompted investors to move their capital from stocks into Treasuries. This phenomenon is termed a "flight to safety," as US Treasuries are traditionally regarded as a secure refuge during times of fear and uncertainty. However, the influx of funds into Treasuries, which pushed prices to new annual highs while driving yields to new lows, proved to be short-lived. The yields on the benchmark 10-year T-Note (Treasury note) soon reverted to their previous trading range after hitting a new low of 3.67% for the year. The 10-year T-note largely overlooked subsequent declines in the stock market and did not react to the flight to safety in the expected manner typical of a normal market scenario.

Fundamental Factors Weigh on the Treasury and Debt Markets

Market fundamental factors are spiraling out of control due to the ongoing surge of the US national debt, now at an alarming 35 trillion. The annual interest expense on this debt has reached 1 trillion, compounded by the soaring cost of living driven by inflation, which together undermines the perception of Treasuries as a Safe Haven. See the chart below.

Inflation and Debt Effects on Interest Rates

The rising levels of debt necessitate the sale of additional Treasuries by the US Treasury Department, leading to an increased market supply. A larger supply generally results in lower prices. As Treasuries prices decrease, their yields or interest rates rise. Inflation, better illustrated by the nonseasonal CPI reports, has risen from 2008 to 2024, reflecting an annual increase in consumer prices of 6.25%. This data can be found on the FRED (Federal Reserve Economic Data) website. In contrast, this report offers a markedly different viewpoint than the seasonal Consumer Price Index (CPI), which communicates monthly fluctuations and reports to the public with minor tenths of percentage changes.

Fed News

On August 23, Fed Chairman Powell announced a policy shift to implement rate cuts in September. However, the response in the Treasury market was subdued, as participants had already factored in this possibility. This expectation was reflected in the Fed Fund's monitor tool, which indicated a 73% likelihood of a 0.25% cut for September even before Powell's announcement.

Markets, including the 10-year T-Note and 30-year mortgage rates, have progressed significantly ahead of the Fed Funds Rate. The 10-year yield and mortgage rates reached their yearly lows in early August 2024 and have notably distanced themselves from their peak levels. Meanwhile, the Fed Funds Rate remains elevated (unchanged) since July 26, 2023, when it stood at 5.25%. Below, you can find the details of the highs and lows of these rates and yields.

Summary

The 10-year T-Note is not responding as expected in a low-interest rate environment, particularly amidst negative economic News and declining stock prices. It failed to maintain its new yield lows following the announcement of a pending Fed policy shift, with a rate cut anticipated in September. The underlying issues of the national US debt and the cost of carrying that debt, coupled with the long-term inflation outlook, adversely impact prices in both the Treasury and mortgage markets.

Technical and fundamental elements influencing market behavior indicate that yields and rates are entering a bottoming phase. Refer to the T-Note Futures Price Chart (below), which has risen to meet a long-term downtrend line as T-Note yields recorded a new yearly low. Now, yields and rates have increased from their lowest levels of the year.

Behind the Debt Ceiling

Sat, 29 Jul 2023 22:44:04 GMT

Behind the Debt Ceiling

Whatever transpires from the debt ceiling faceoff between the White House and GOP may only be the symptom of the more significant underlying issues of US national debt growth and acceleration of interest cost to our country.

Review of National Debt & US Interest Payments

The 2008 benchmark time frame can be used when the credit crisis collapsed the US economy and prompted the US Federal Reserve to implement a quantitative easing money plan, which then the Fed purchased assets. This accounting for the Fed assets is termed the Fed Balance sheet. The national debt in the 2008 period was at 10.7 trillion. The Fed balance sheet has grown as high as 9 trillion since then and remains high today at 8.5 trillion, which is approximately 80% of the national debt when the Fed Balance Sheet started. Today's US national debt is at 31.8 trillion, which has nearly tripled since 2008. The interest payment on current government expenditures is 928 billion, up over 50% since 1st quarter of 2022, then at 603 billion. See chart Interest Payments.

Federal Government Current Expenditures: Interest Payments 18(81.8%)

Technical Aspects

US interest payments on government expenditures are in an upward parabolic formation, a sharp upward direction that translates to a faster pace of US debt growth.

Treasury note prices have remained in a long-term downtrend, upward for yields/rates. Even as the 10-year note yields corrected from over 4.00% to 3.25%, the 10-year Note held its downtrend price pattern (upward yields).

Conclusion

Chart formations for the 10-year Note have remained bearish, and since the trend is a continuum until change continues to define rates upward. The underlying factors behind the debt ceiling will contribute to more significant US national debt, and growing interest expense is inflationary, which contributes to a higher interest rate environment.

10Yr Treasury Note Analysis A Technical Case for Higher Rates

Sat, 21 Jan 2023 22:52:17 GMT

10Yr Treasury Note Analysis A Technical Case for Higher Rates

Fundamental Factors

Interest rate markets have been in a correction (easing) phase since rates peaked in October 2022. Market corrections are adjustments to a significant upward trend. This interest rate correction was partly fueled by a decline in the Consumer Price Index (CPI) and Producer Price Index (PPI), thus reducing the current inflation outlook.

The CPI has declined over the last six months from monthly changes reported from June (1.9%) to December (-0.10%) of 2022. The CPI twelve-month unadjusted yearly average as of December 2022 is 6.5%, which is much higher than the Federal Reserve's inflation target rate of 2.00% and may explain Federal Reserve Chairman Jerome Powell's position to tighten rates further.

Debt Matters

Debt is also an essential element of inflation. The interest growth alone on the US national debt has skyrocketed in the fourth quarter of 2022, increasing to $213 billion, $63 billion higher than last year, as the national debt ceiling approaches $31.4 billion.

Technically Speaking Divergence

On January 19, 2023, a divergence occurred between the 10-year Treasury note (T-note) cash and futures markets. The 10-year T-note failed to reach a new low under 3.32%, while the futures prices recently reached new highs before falling. Divergences often signal major turning points in markets.

In this case, a negative divergence showed price weakness in the 10-year T-note, suggesting a bearish Treasury market or higher rates (yields) ahead.

Market Characteristics

On January 18, 2023, just one day before the 10-year T-note divergence signal, the PPI reported a lower-than-expected monthly change of -.5 %. The next day, the 10-year T-note prices rolled over and dropped to the price support. The yield resistance level of 3.55% broke through on February 6, 2023. In addition, this behavior occurred in the previous two CPI reports on December 13, 2022 (0.0 monthly change) and January 12, 2023 (-.01 monthly change). In other words, the 10-year T-note is not improving after lower inflation data, a negative sign for Treasury prices causing upward rates.

Intermediate-Term Cycle

The 10-year T-Note has a 3-4 month (intermediate) term trend. Rates known as yields on the 10-year Note have been easing since October 21, 2022, with a peak Yield of 4.23%. From a market cycle timing perspective, the end of the easy phase of rates is completed between January 21 and February 21. This suggests that rates are in front of an uptrend for the next quarter, which aligns with the significant uptrend of interest rates defined by the 10-year T-Note monthly chart.

Summary

The Treasury market shows bearish signals because a divergence developed between the 10-year T-note cash and futures markets. Just prior to this divergence, negative market characteristics occurred after lower CPI and PPI readings. T-Note chart formations of yields failed to move under 3.22%, then shot up through the resistance to recent new highs of 3.69%. Technical indicators are aligning for the Treasury market to resume the significant up trend for rates.

Market Review After Peak Correction

Fri, 12 Aug 2022 18:20:40 GMT

Market Review after a Peak Correction

After mortgage rates peaked at 6.0 percent in June, then corrected in early July to 4.875 percent for 30-year conforming loans. Corrections in mortgage rates are normal. The current improvement in the interest rate market does not change the overall upward trend of interest rates. The Fed is combating inflation, and they continue to move up their funds rates and allow their balance sheet of nine trillion in U.S. treasuries and mortgages to gradually run off. That means the assets that are maturing will not be replaced, which will reduce the size of the balance sheet assets. This is another way to reduce the demand for mortgages and treasures, causing upward pressures for treasury yields (rates) and mortgage rates.

Mortgage Rates Move Ahead of Fed

Tue, 10 May 2022 18:14:26 GMT

Mortgage Rates moved ahead of the Fed

On November 3rd, 2021, the Fed announced its change in strategy from a lower interest rate environment to higher interest rates. Mortgage(conforming) rate 30-year loans were offered at 3.25%. Since then, the 30-year mortgage rate has reached 5.50% (National Average).

After the mortgage rates moved up by 2.25%, the Fed increased the Fed Funds rates by 0.5% on May 4th, 2022. The Mortgage and Treasury Markets did not wait for the Fed to make their move but moved well ahead of the Fed. Rates have been moving up Quickly.

Bonds Dictate the Trend of Interest Rates

Sat, 12 Feb 2022 23:22:07 GMT

Bonds Dictate the Trend of Interest Rates

On February 10, 2022, the January CPI (Consumer Price Index) over 12 months was reported at an increase of 7.5%, a level not seen since 1982. In the late seventies and early eighties, the United States experienced high inflation rates. The Fed's target rate goal of inflation has been at 2.0%, but this continues to be drastically exceeded by rising consumer prices over the past few months. Rising consumer prices have caused further deterioration of the bond market (causing higher rates). The 10-year Treasury note (type of bond) yield breached the 2.0% yield (rate) level by the following day, which increased 1.5% since its bottom in fall 2018. The 30-year mortgage rate increased to 3.70% after the CPI, over 1.0% from its January 2021 bottom.

Charts and Market Characteristics

The ten-year Treasury note price charts were trending lower (upward yields) and failed to respond to a flight to security when the stock market fell sharply on the unexpectedly high CPI. A typical reaction in a normal market, when stocks fall sharply, is that investors move to safety and buy US Treasury bonds. However, simultaneously falling Treasury bonds and stock prices are characteristic of higher inflation and a higher interest rate environment.

Fundamental Factors

The Fed balance sheet of assets (e.g., Treasury, mortgage backs, commercial debt) has grown almost tenfold since the 2008 credit crisis and reached 8.5 trillion. The Fed's strategy is to reduce its balance sheet to help counter inflation. This strategy will weaken the demand for treasuries and mortgage securities, thus increasing rates.

Summary

It is a myth that the Fed has ultimate control of interest rates. Treasuries and mortgage-backed securities markets determine long-term interest rates. Mortgage rates and Treasury yields bottomed and reversed to uptrends one to three years ago. These markets' rates/yields have moved higher long in advance of the Fed's recent plan to increase interest rates to combat inflation.

The End of Easy Money

Sat, 27 Nov 2021 23:29:10 GMT

The End of Easy Money

The Federal Reserve (Fed) has maintained an easy money strategy since the credit crisis of 2007-2008. The Fed accomplished this by an unconventional plan of buying US Treasury bonds and mortgage securities, along with its traditional means of decreasing Fed funds rates. Initially, this strategy appeared to be an emergency plan to stabilize the financial markets immediately and prevent further deterioration of the economy amid the credit crisis. To the Fed's and the US Department of the Treasury's credit, the plan worked.

This plan was carried out for the long term until November 3, 2021, when the Fed announced a change in its policy to reduce the amount of debt from its holdings (debt regarding US Treasuries and mortgages). This shift in Fed policy is no surprise to many Fed critics. These critics know that the past Fed's easy monetary policy is a contributing factor to inflation. With the shortage of goods in various industries, we have reached the standard economic definition of inflation, which is "too much money now chasing too few goods."

On November 10, 2021, the October consumer price index (CPI) caught the market by surprise, reporting at 6.2%. The yearly average for 2021 is now at 5.4%, which translates to inflation. At the same time, the key benchmark of long-term rates is the 10-year Treasury note yield (rate) at 1.58%. Thus, the 10-year Note appears to be yielding negative returns.

Inflation is one problem for the Treasury market and general securities (bonds and stocks). The other problem is that the Fed is dialing back on the demand factor that promoted the lower rate over the past dozens of years.

In summary, the Fed's policy change to reduce its purchases of treasuries reduces demand, and combined with negative real yields of treasuries, it is detrimental to the general debt market (bonds/mortgage) prices. To compound matters, inflation (rising prices) is more substantial than anticipated by the market. The past 13 years of an easy money policy are ending; thus, the next cycle is an uptrend for interest rates.

False Perception of the Fed

Sat, 02 Jan 2021 23:37:09 GMT

False Perception Of the Fed

In 1986, the Fed dropped the discount rate three consecutive times during that period, causing bond yields to rise (as their prices fell). Shortly after the third and last Fed discount rate cut, the Bond market collapsed, sending interest rates through the roof. The Bond market dictated the interest rate trend, not the Fed.

Even though the first recent Fed increase was in February 1994, the Bond market started increasing its yields (rates) a month before, in mid-October 1993.

Although the Fed sets its short-term rate of discounts and Fed funds, the public and news media perceive the Fed as the director of setting the general interest rate trend, while the major center of influence is the market. The news media is always looking to create a news story. The News is perceived as what 'is happening' when it is more about what 'has happened.'

The Fed reacts to market events. The media reports the Fed's reaction to the market as what is ahead of us, not what has already occurred with interest rates at the consumer level. Those focused on what the Fed is doing are usually out of step with the center of influence of interest rate trends, the market (bond).

If you want to stay in tune with interest and mortgage rate trends, focus on what the market is doing and not what the public and news media perceive of what the Fed only appears to be reacting to.

Anatomy of a Cycle Low in Interest Rates

Fri, 14 Jun 2019 16:07:53 GMT

Anatomy of a Cycle Low in Interest Rates

by Alan M. Fine and Glen Katz

T reasury bond yields are one of the most closely watched financial statistics. Changes in interest rates are felt widespread and influence everything from Federal Reserve policy to the average home buyer's de cision. These reactions in turn affect interest rates in an endless circle of cause and effect. Making sense of these complicated economic relationships through a fundamental analysis (the study of raw economic data to forecast price) and how they impact rates can be confusing.

I Our approach to market forecasting emphasizes the study of price action which involves technical analysis (the study of market action through the use of charts and mathematical equations). By understanding the movement of prices in the bond market, we can expect to get a clearer picture of future interest rate direction. A study of there cent cycle low in bond prices will show you what to look for to identify future turning points in the interest rate cycle. To accomplish this we will focus our analysis on the 30-year U.S. Treasury Bond and evaluate the market in terms of 1. Fundamentals, 2. Cycle periods, 3. Major and minor trends, 4. Technical indicators, and 5. Chart patterns. We selected the month of May to evaluate; it was significant because bonds bottomed, which means interest rates peaked, and two weeks later inflation started to rise.

Bond traders follow fundamentals from monetary indicators to economic statistics for clues to one thing-inflation. Inflation is the biggest fear of traders as well as the cornerstone of Federal Reserve policy and the outlook recently has been negative for bonds. On May 23 the Commodity Research

Bureau Index (CRB) rose to a 3 1/2 year high and was viewed as a signal of rising inflation. This measure of commodity prices was alarming because it was so broad-based, with strength coming from grains, metals, crude oil and coffee. The other area of major concern is the recent slide in the U.S. dollar. In the past, a falling U.S. dollar has often resulted in a tighter money policy by the Fed. The failure of the U.S. dollar to rally despite Fed intervention on June 24 may leave the Fed no alternative but to raise interest rates. Strong business loan demand and high employment have added to the bearish sentiment in the bond market.

Markets move up and down, forming tops and bottoms. Being able to fit these highs and lows within a defined time period is called a cycle. Because cycles are repetitive, they imply a certain predictability. This allows you to project the time frame when cycle tops and bottoms are due to occur. We have identified an approximate three month cycle in interest rates over the past few years. With the last significant turning point in early February, our cycle indicated that we were moving into a time frame for a potential low in terms of bond prices at the beginning of May. The actual low was made on May 11, representing a probable high in interest/mortgage rates.

As the cycle time frame became favorable, the minor and intermediate trends were down, suggesting the next impending mo,·e would be neutral to up. A look at the major trend based on the monthly charts revealed the most interesting picture. A trend-line drawn from the lows in July, 1984 to the lows of September, 1990, came right in to the lows in May, 1994. As long as prices remain above this 10-year trend-line, the major trend is still considered to be up. The fact that bond prices came right to the major trend-line and held is an important chart event that should be watched closely. Currently, the minor and intermediate trends are neutral as bond prices have basically moved sideways for the last three months. To better gauge market trends, oscillators (technical measuring tool measuring momentum and strength that signal extremes of selling or buying) add another dimension by determining if markets are overbought or oversold by measuring momentum and looking for divergence. A divergence occurs when the price and the oscillator move in opposite directions. As bond prices declined in May, momentum oscillators revealed they were severely oversold, and along with the formation of a bullish divergence, warned of an impending move up. Our Market Characteristic oscillator links sentiment with price action by observing how the market responds to news events and reports. For example, the recent highs in the CRB index occurred after the cycle low in bond prices on May 11.

Chart patterns are pictures or formations that can be classified as reversals or continuations, each with their own set of rules and implications. No observable pattern was apparent until the last week in May when a potential head and shoulder formation developed. This is a common reversal pattern and considered to be one of the more reliable ones. A buy signal is indicated by a close over 105 3/4 (September bond futures) and suggests a potential price objective around 110 1/4 corresponding to a cash yield of approximately 6.9 percent and a 30-year fixed mortgage rate of 7 7/8. This scenario is valid as long as prices remain above the cycle low.

All of our indicators lined up to suggest a potential reversal of prices in May. Cycles told us the time was right. Oscillators said the tendency was strong. Market Characteristic showed us the divergence between price action and fundamentals, adding truth to the statement that markets bottom on bad news. Trend analysis revealed the major trend is still up as prices held above the 10- year trend-line. A breakout of the head and shoulders formation will show this cycle low may be a trend change.

Based on the May cycle, our analysis now favors stable to lower interest rates through mid-August, as the recent downward trend in bond prices developed into a sideways neutral move. Watching the 10-year trend-line and the head and shoulders formation in the bond market may be the key to the next major move in mortgage rates.

ALAN M. FINE

is director of Real Source Interest Rate Advisory, San Diego, CA.

GLEN KATZ

is market analyst at Real Source Interest Rate Advisory, San Diego, CA.

Interest Rates and Charts

Thu, 13 Jun 2019 17:47:27 GMT

Interest Rates and Charts

I f you want to know where interest rates are going, you've got lots of options. There are the technicians or self-described "chartists" who will tell you that if you just look at some plotted points on a graph you will see the future course of rates.

We tried our hand with one of these folks, but for safekeeping, we also consulted a true expert on Fed policy. Former Federal Reserve Board Governor Lyle Gramley, now a consulting economist with the Mortgage Bankers Association of America, says that rates for the next year or so willstay fairly dose to where they are now, with a slight bias in an upward direction. Gramley is telling mortgage bankers that they have at least one more year of good business "between now and the middle of 1994;' but after that, it gets more difficult to predict. The ex-Fed governor says that "a year from now, we may have to think about inflation getting worse and the Fed may have to tighten monetary policy, unless we get some substantial action on the deficit. And although we can't rule that out right now, we certainly can't count on it."

Gramley says that from observing what's been going on in Washington, D.C. recently, serious action on the deficit is just not a sure bet for budget years beyond FY 1994. This uncertainty as perceived by the market is what helped boost long bond rates above the 7 percent mark in May. Gramley says two things "bothered the bond market" enough to jack up the 30-year Treasury rate. He says the first was worries about worsening inflation and the second was "worries that the Clinton administration is out of touch with reality!' And even though the price of gold hit a two-year high on May 18, according to The New York Times, implying investor concerns about inflation, Gramley says that "nothing is showing up badly" as far as numbers suggesting a real upturn in inflation. But Gramley said "gold bugs are like chartist.r-theylike to worry:' Even so, he says, the other side of the

coin is "there isn't a shred of evidence that inflation is improving this year." Gramley said that there was "still some hope at the beginning of the year [that inflation was showing further improvement], but the numbers that came in for the first four months of the year ruled out that hope!'

This year the producer price index for finished goods (excluding food and energy) has been running around 2 per cent or a little less on a year-over-year basis. Measured similarly, consumer prices have been up at about 3.25 to 3.5 percent Gramley says that an even more fundamental indicator of inflation is compensation per worker and those numbers also appear tame. The economist says that inflation will worsen when costs turn up. But price increases merely to widen corporate profit mar gins are being kept in check by a very competitive world economy.

Gramley says, apart from worsening inflation, signs of a quickening pace of economic growth are the other key fac tor that would prompt a rise in interest rates. But prior to the release of revised first-quarter GDP figures, Gramley pre dicted a revision in the number that would take the quarter's growth rate "down below 1 percent:' He said that he is "not pessimistic about the economy" even though the first quarter's showing was clearly pretty dismal. Even so, Gramley contends that "this economy is not falling on its face."

We will see better growth in the second quarter, he predicts, but "not growth that is fast enough to start worrying about inflation getting worse." To illustrate his point that there is substantial slack in the economy before inflationary pressures could start doing real damage, particularly in terms of wage hikes, Gramley points to recent employment gains. "Normal" job gains, by historical standards, are in the range of

300,000 a month during a recovery. Gramley says that during the third quarter of 1992 the monthly average gain was 25,000. The fourth quarter 1992 improved to 80,000 per month and the first four months of 1993 aver aged 133,000 per month.

Moving now to the subject of charts and what their power to portend, the ever-lucid Gramley says this: "I like charts that illustrate points. I don't like charts that give you magic answers." But charts to a chartist take on far grander meaning. Alan Fine, market specialist and originator with Real Source, a mortgage brokerage firm in La Jolla, California, is just such a self-described "technician" who has been tracking bonds for 10 years. He says the tools of the trade he learned in trading commodities and selling mortgage securities to private investors have helped him perfect the ability to track bond market turning points.

Take last March, for instance. Fine says the bond market hit a high (in terms of prices for 30-year T-bonds) on March 4. On March 14, he says, the market "retested the high of 113." That point on the charts was never exceeded, he says. Then he describes what goes on in a chartist's head as they gaze over such a chart "What goes off in a technician's mind, because the market is failing to go any higher, is you've got chart points that show a double top. And since [the price of bonds] have an inverse relationship with mortgage rates, when bonds are high, then mortgage rates are at a low." Midanet pricing data from Freddie Mac showed March 8 as a trough for mortgage rates at 7.25 percent.

When Fine sees such a formation in bond market activity, he scrambles to convince his borrowers to lock. Because he works with fairly sophisticated borrowers in the high-rent district of La Jolla, his knowledge sometimes moves people to act rather than simply scratch Boardroom.

MORTGAGE BANKING - JUNE 1993

Boardroom View from page 11 their heads. He notes that the week of May 10, he convinced a borrower to lock by actually sending him a chart that showed the bond market had topped.

But the predictive ability of these charts in the grand murky middle of these cycles, which Fine says last between four and five months between topping and bottoming points, is far less impressive. Fine concedes that "yes, it's difficult to see a top." But recently, Fine says that May 14 was a "turning point in sentiment" in the bond market, after that point the bond market moved into an inflationary perspective. He says at that point, "bonds were forming a high-you could see it on the charts."

But Fine says "the formations of the market usually are more powerful than a flash of news. Charts take all the factors in the world and assimilate it. Charts give you a summary of what the forces that play on the [bond market] are. Charts give you a very big picture."

Whether you've got the religion or not is up to you. Fine says his charts tell him it would be a very prudent move as of May 25 to lock rather than float and to refinance out of ARMs into fixed rates if you plan to stay in your house. He says we could still see another eighth of a percent dip in mortgage rates while the market meanders in 1 "this gigantic range" in the middle of this new cycle.

Janet Reilley Hewitt

Editor in Chief