By Nick Van Eman
Wall Street Journal Article #1
The title of the article I chose is “Treasury Yields Primed to Increase”, from the Monday, October 9th edition of The Wall Street Journal. It discussed how the recent increase in Treasury-note yields is going to bring Treasury prices down. The two-year note rose from 4.658% to 4.746%, while the ten-year yield rose from 4.61% to 4.70%. Upward revisions to previous months U.S. employment figure had a negative effect on Treasury prices, despite a weaker than expected figure for the most recent employment numbers. Currently, the short-term interest rate futures market is pricing in a high likelihood of rate cuts next year. This would lead to an increase in the prices of T-notes already issued. The market continues to expect rate-cuts in the future despite the Fed’s warning that inflation remain a risk.
This article is directly related to chapter two, determinants of interest rates, and chapter three, interest rates and security valuation. The main concept from class that I applied to this article is the effect of interest rate changes by the Federal Reserve Bank. When interest rates rise, the price of existing treasury securities decreases, and when the Fed lowers interest rates the value of outstanding Treasury securities increases. This inverse relationship works with all fixed payment securities, such as bonds, and the market reacts to almost any news that could affect the economy.
By Nick Van Eman
Wall Street Journal Article #2
The title of my article is “Bad Loans Draw Bad Blood”, from the Monday, October 9th edition of the Wall Street Journal. The housing market has slowed down in the past few months, made worse for the banks by the fact that defaulted loans are on the rise. When lenders sell large blocks of mortgages to investment banks, there can be some bad blood, and confusion, when the loans go into default. Luckily for the investment banks there have been provisions in their contracts that if a mortgage goes into default quickly, they can force the lender to buy them back. This also occurs with loans that have underwriting mistakes, such as flawed property appraisals. Now that the market has cooled down, lenders are starting to pay more attention to their underwriting activities and trying to get better customers in the first place. Mortgage repurchases are frequently un-reported, so it is difficult to gather meaningful numbers on them. Adjustable rate loan defaults have been the fasting growing kind of defaults recently.
This article ties in to what we learned in class about investment banks. Investment banks frequently buy large blocks of mortgages as investments. This investing activity makes up a large part of their overall business. If they can continue to force the lenders to buy back defaulted loans, they will be in somewhat of a win-win situation. However, the lenders have been suing and counter suing, sending some firms into bankruptcy. Obviously the lenders would prefer not to buy back large amounts of defaulted loans. Lenders tightening up loan approvals to create less defaulting mortgages could further contribute to the housing slowdown, as it gets more difficult for consumers to qualify for a mortgage loan.