Mortgage Applications Drop, Treasury Auction Goes Off Poorly
What seems contradictory at first is that existing home sales reached a record level last month, although new home sales dropped off dramatically. Many economists see the jump in November existing home sales as the "credit rush" that was in full swing as people contemplating a home purchase moved to fulfill their desire and complete their transactions in advance of expected higher mortgage interest rates they would bear if they waited any longer.
In separate but related news, the U.S. Treasury Department's auction of $24 billion in 2-year Treasury Notes received scant attention from the global lenders to the United States. In an auction that was characterized as thinly attended even by traditional purchasersincluding foreign central banksof U.S. debt instruments, the price of the intermediate-term Notes had to ease considerably to attract sufficient buying. As the price of a debt instrument falls, its yield rises, and this round of discounting pushed the yield on the 2-year Treasury Notes to 3.12%, the highest yield at such a sale since mid-2002.
Aside from the certain and undesirable effect that rising U.S. interest rates will have on the demand for credit among home buyers, foreign trading partners are hoping that those same rising U.S. interest rates will slow down or possibly even reverse the slide of the dollar against other major currencies. Because U.S. interest rates are the price of U.S. dollars, as those interest rates rise, other nations hope the dollar will become stronger. That would please other nations like the Europeans and the Japanese, whose foreign currency reserves of greenbacks have lost considerable value with the dollar's weakness. A stronger dollar would also make U.S. exports to those countries become more expensive, thereby reducing the negative impact cheap American imports are having on the economies of Europe and Japan.
Unfortunately, despite the yield rise today at the Treasury auction, the dollar hit another new low at $1.3646 against the euro before recovering slightly to $1.3600. The dollar pressed close to an all-time record against the yen, closing at ¥103.93. Together, these numbers indicate that it will take considerably higher U.S. interest rates before the dollar stops it long-term slide; but those same considerably higher U.S. interest rates will spread their adverse effects domestically far beyond the housing market, likely setting the United States on an inevitable course for a recession next year.