The financial markets endured another week of extreme bipolar behavior, with enormous intra-day mood swings that normally wouldn’t be seen over the course of several weeks. While Bonds and home loan rates wildly rocketed higher and plummeted lower on a daily basis throughout the week, fixed home loan rates ended up improved by about .25% for the week overall. And last week…the action started unusually early, stemming from some almost unprecedented weekend actions by the Fed.
Last Sunday night, the news broke that the Fed had not only decided to make a move to lower the Discount Rate by .25%, just two days ahead of when their normally scheduled announcement would arrive, but also that they had helped facilitate the bailout of investment giant Bear Stearns. The 85-year-old company had its stock purchased by JPM Chase at $2 per share, for $236 Million…yep, that’s Million with an M. Bear Stearns was trading near $90 at the end of February, with a 52-week high near $160. Bear Stearns was the number one buyer of sub-prime home loans, with a huge appetite for this type of paper – and they bought sub-prime transactions with both fists, a strategy that certainly came back to haunt them.
Adding to the manic-depressive mix was a huge news day on Tuesday, starting with earnings and outlook from two other major financial players – Goldman Sachs and Lehman Brothers – who reported much more positive results than had been anticipated. Particularly on the heels of the Bear Stearns situation, this was very welcome news to a jittery Stock market. New construction numbers came out mixed, along with a hotter than expected read on wholesale inflation via the Producer Price Index…and as if it all weren’t enough already, the Fed released their official decision to cut the Fed Funds Rate by .75%. Many people expected a deeper cut, but they likely kept the cut to only .75% because of continuing fears of inflation.
But wait…there’s still more. On Wednesday, investment banker Morgan Stanley also came out with a great earnings report, which again was seen as good news by the Stock market, but pulled money out of Bonds. But then…along came big news from the Office of Federal Housing Enterprise Oversight (OFHEO), who announced that they lifted special capital restrictions that had been put in place for both Fannie Mae and Freddie Mac. This will allow these firms to pump $200 Billion into the mortgage market by way of buying Mortgage Bonds. The anticipated increase in demand was very good news for Bonds and home loan rates, which immediately improved on the news.