I have a new Commercial Loan Tip for you further down. Feel free to skip there.
Joke Du Jour:
A man asks a farmer near the field, "Sorry sir, but would you mind if I crossed your field instead of going around it? You see, I have to catch the 4:30 PM train." The farmer says, "Sure, go right ahead. And if my bull sees you, you'll even catch the 4:00 one."
Treasuries Are No Longer the Risk-Off Asset - Very Disturbing:
Something momentous happened in the financial markets this week, and no one noticed. Gold suddenly became the flight asset of choice for worldwide investors. The former asset of choice was U.S. Treasuries.
As Hamas terrorists inflicted horrible tortures on Israeli civilians, gold soared from $1,806 per ounce two weeks ago to $1,993 as of Friday. That’s hardly a big deal in times of geopolitical crises. Most times when there is some crisis, gold goes up.
This time, however, U.S. Treasuries went down (the yields went up). The Treasury had to raise rates even higher to sell out its latest auction. Normally, when world investors are frightened, they flock to the perceived safety of U.S. Treasuries, and Treasuries increase in value, and yields fall. Now, not so much.
This is hardly surprising. The Japanese used to be the biggest consumers of U.S. Treasuries. Nowadays, Japan seldom buy U.S. Treasuries. China has become a net seller.
Mohamed El-Erian wrote in the Financial Times words to the effect that the U.S. Treasury no longer controls and dominates the long-term bond market (what El-Erian calls “footing” or “anchoring”), and it is in danger of losing control over the short-term bond market as well.
Currently, long-term Treasury yields are hovering near 5% amidst a massive US bond sell-off, due in part to a strong US economy that will require extended tightening to further rein in inflation. This also comes as the US ran a $1.7 trillion deficit in fiscal year 2023, with the Treasury Department issuing a massive supply of bonds.
The goal of every mortgage broker should be
to become a mortgage banker.
With the Fed now shrinking its balance sheet, he asks who will buy our bonds? High rates are attracting some new investors, especially households; but the continued resilience of the bond market (the presence of hungry buyers) is not something investors should take for granted, he warned.
Noted economist, Peter Schiff, recently expressed concern about long-term U.S. Treasuries and suggested gold as the new safe asset for investors. “Right now, one of the riskiest financial assets is long-term U.S. Treasuries. But for the past several decades, they’ve been the go-to, risk-off asset. Investors need a new safe-haven asset, and the only one left standing is gold.”
What does “risk-off” mean? During periods when risk is perceived as low; i.e., risk-on, investors tend to engage in higher-risk investments. When risk is perceived to be high; i.e., risk-off, investors have the tendency to gravitate toward lower-risk investments.
Commercial Loan Lesson - Loan Constants:
In the old days, when no one had cell phones or even hand-held calculators, how would you calculate your loan client's expected payments?
Fannie Mae would use its big "supercomputer" to calculate the monthly loan payment on a loan of exactly $1,000 over 30 years at the new interest rate. Your loan origination manager would announce that, "Fannie Mae just went up to 4%. The new loan constant is 4.77."
In other words, if you paid for $4.77 every month for 30 years on a 4% loan, you would pay it off in full.
So if your client was applying for a $16,000 loan, you would simply multiply the loan constant by 16.