Yields Slide on Economy News : Markets: Traders are betting on Fed action. California mortgage lenders cut rates.
Long-term bond yields plunged Friday to their lowest level since early 1994 as unexpectedly bleak reports of a sputtering U.S. economy prompted more investors to bet that the Federal The yield slide immediately found its way into the California mortgage market, as lenders began cutting their rates in response to the market declines. That could draw more buyers into the real estate market--boosting the state’s lackluster housing industry--and offer existing homeowners another opportunity to refinance their mortgage loans.
Stock prices, meanwhile, were mixed as investors sorted out whether the benefits of lower lending costs might be offset by eroding corporate profits caused by the weakening economy.
The Dow Jones average of 30 industrials fell off its record-high perch set Thursday and lost 28.36 points to 4,444.39, though the blue-chip measure still ended the holiday-shortened week with a 75.39-point gain.
But some broader market gauges rose, and gainers overall led losers 5 to 3 on the New York Stock Exchange.
The markets’ response was sparked by a Labor Department report showing that business payrolls in May fell by 101,000--the sharpest decline in four years. Many analysts had forecast an increase, and the reversal raised expectations that the Fed will lower rates even further this summer to prevent a recession.
“This is the type of economic number that was just unambiguously negative,” said Mickey D. Levy, chief financial economist at NationsBanc Capital Markets Inc. in New York. “It probably also rattled the Fed.”
But the bond market cheered, as it often does when poor economic growth portends lower rates and stable inflation. The Treasury’s bellwether 30-year bond rocketed up more than 2 points, or $20 for every $1,000 in face value, then drifted lower before finishing with a gain of 1 1/8 points on the day.
The bond’s yield, which falls when its price rises, finished at 6.53%, compared to 6.60% on Thursday. It was its lowest yield since mid-February of 1994.
In another ominous economic sign, the Commerce Department said its index of leading indicators--a forecasting gauge of economic activity--fell 0.6% in April, its third straight monthly decline.
“All of us are surprised by how weak” the figures portray the economy to be, said Maury Harris, chief economist of PaineWebber Inc., adding that he believes the Fed should now cut short-term interest rates after repeatedly raising them in 1994 and early this year.
The economy’s slowdown has given rise to an unusual situation often seen as a harbinger of possible recession. Yields on three- and six-month Treasury bills are now higher than rates on one- and two-year Treasuries. This “inverted” yield curve reflects investors rushing to buy longer-term securities--thereby driving their yields lower--because they sense a weaker economy and reduced inflation worries.
Meanwhile, the Fed’s earlier rate hikes are still being felt in some parts of the mortgage market. For instance, the 11th District cost of funds--a rate to which many adjustable-rate mortgages are tied and one that typically lags current market rates by several months--has been creeping up and stands at a 21-month high of 5.1%.
But Friday’s slide in long-term rates bodes well for property owners looking for new, long-term mortgages, and many analysts expect mortgage costs to keep sliding through the summer when home sales are traditionally at their peak.
On Friday alone, the average rate for a conventional 30-year, fixed-rate mortgage in Southern California dropped to 7.581% from 7.873% on Thursday, according to Mortgage News Co., which tracks rates offered by the region’s major lenders.
That “gigantic” decline would cut the monthly interest and principal payment on a $200,000 fixed-rate mortgage by $40, to $1,410, said Mortgage News President Earl Peattie.
But it’s unknown if the declines will spark a sizable gain in housing sales, or mostly benefit the refinancing market. Many lenders have reported a steady increase in mortgage applications as loan rates have fallen from their peak last November, but “it’s not like it’s shooting up,” said Bank of America spokesman Richard Beebe.
Indeed, lenders and realtors alike remain cautious. “There is a lot of concern about whether we are headed for a recession, and that does not bode well for the [real estate] market,” said Glendale Federal Bank spokesman Jeff Misakian.
Refinancings at Glendale Federal currently amount to 35% of its mortgage applications, up from about 20% three months ago, he said.
Among the stock market’s broader gauges, the Standard & Poor’s 500-stock composite index slipped 0.98 point to 532.51, and the NYSE composite index slipped 0.20 point to 286.53. Big Board trading volume swelled to 366 million shares from 346 million Thursday.
The Nasdaq composite index rose 4.15 points to 872.97, thanks to a rally in technology stocks.
Among large tech issues, Intel rose 1 3/4 to 116 1/2 and Lotus Development jumped 3 1/4 to 32 1/2, but Digital Equipment fell 7/8 to 44 7/8.
Other highlights Friday:
* On the NYSE’s most-active list, Motorola fell 1 1/8 to 60, Chrysler lost 1/2 to 44 1/8 and BankAmerica gained 1 to 53 7/8.
* Corrpro plunged 8 1/2, or 47%, to 9 1/2 after the corrosion-control engineering concern predicted earnings well below analysts’ forecasts.
Stocks advanced in foreign trading. Mexico’s Bolsa stock index rose 21.57 points to 2,033.37, while the FTSE-100 index in London gained 4.4 points to 3,345.0. Frankfurt’s 30-share DAX average was up 13.48 points to 2,132.72, and the Nikkei 225-share index in Tokyo rose 254.56 points to 15,849.13.
In foreign exchange trading, the dollar fell against most major currencies. In New York, the dollar fell to 84.35 Japanese yen from 84.82 on Thursday, but it stood at 1.4085 German marks, up from 1.4074.
* JOB NOSE DIVE: Unemployment rises sharply. A1
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Recession Ahead?
Several recent economic reports--including those showing a loss of jobs and a third straight decline in the government’s leading economic indicators--have increased concern that the nation’s economy may be in danger of slipping into recession.
New Jobs
* While California job growth continued in May, the nation suffered its biggest loss of jobs in four years.
In the Nation
In California
Leading Economic Indicators
The government’s chief forecasting gauge fell a third straight month in April, the first time that has happened since 1990. Such a decline is largely thought to indicate a possible recession.
Seasonally adjusted index (1987=100)
Positive indicators * Higher stock prices * Declining bond yields * Rising construction spending * Rising consumer confidence * Rising building permits
Negative indicators * Shorter average workweek * Rising jobless claims * Fewer unfilled orders for durable goods * Declining factory orders for consumer goods * Easing raw material prices * Falling new orders for plants and equipment * Declining money supply * Faster business delivery times
“Inverted” Yield Curve
* Investors now demand a higher yield on three-month Treasury bills than for one- or two-year Treasuries. This phenomenon, represented in an “inverted” yield curve, is often a harbinger of recession. As investors sense a weaker economy and reduced inflation worries, they are rushing to lock in longer-term yields, pulling them lower.
Treasury maturity
Long-Term Interest Rates
* We are not alone. Long-term interest rates are declining worldwide, reflecting a broad global slowdown in economic activity.
10-year bond yields for U.S., Japan and Germany
Researched by JENNIFER OLDHAM / Los Angeles Times
Sources: Associated Press, Bloomberg Business News, Reuters, Labor Department
