Earlier this year, you read in this column that rates could actually reach lows set last November. If you missed the boat then, it might be time to get your passport ready one last time. This Spring saw a few factors come into play at the same time and one of those factors was attributed to Enron and Enron-like scandals.
The “Enron influence” on mortgage rates suggested that as investors lost confidence in corporate reporting, accounting and guidance, then money would conceivably exit the stock market and into fixed instruments like bonds, bills and notes. When there are more buyers than sellers of bonds, that drives up the price and lowering yields. After the dust settles, lower mortgage rates are the result.
But these past few weeks we’ve seen more than our share, and certainly more than Wall Street would like to see, of corporations getting into trouble because problems with telling the truth. They lied. And that makes investors queezy. No, really. But recent corporate conundrum could help drive mortgage rates even further. Especially if this whole mess drags on throughout the rest of the year. What’s different now? There are fewer safe havens.
When investors pull money out of stocks, they can either keep it in cash or invest in something more secure, like bonds. And the government isn’t the only issuer of bonds. Companies can issue bonds to raise money just like your local school board can. The difference between corporate and government issuances of bonds lies in their risk. The 30 year Treasury Bond is backed by the full faith and guarantee of the United States Government. Corporate bonds from Willie’s Widget may also be backed by the full faith and guarantee of Willie’s Widgets but somehow it just doesn’t carry the same weight as Uncle Sam.
Corporate Bond yields have to pay the investor more than Uncle Sam will pay to make up for the perceived increase in risk. In times of heady stock market rallies and NASDAQ records, investors can overlook this risk and put more money in Corporate Bonds than normally would otherwise.
Now, if those same investors can’t trust corporate bonds with the same fervor that they did before Enron, WorldCom, ImClone, Arthur Andersen, et al, then where do they put their fixed investments? Somewhere safe. Government bonds and Mortgage Backed Securities for starters.
This additional quest for safety can pull money away from corporate issues, which can compete with mortgage backed bonds, and drive up prices on mortgage bonds, lowering your mortgage rate. And unless all the “bad guys” have been found, we may find still other companies who can, indirectly, lower your monthly house payment through questionable accounting.
Published: June 28, 2002
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