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Whats the dollar really worth?
Wednesday, June 10, 2009
Earlier today, a Russian central bank spokesman said the Soviet Union intends to cut the share of U.S. treasuries in its $400+ billion reserve and buy bonds issued by the International Monetary Fund instead. The Russian government does not plan to liquidate their treasury position immediately -- but will make the move gradually - replacing U.S. government notes and bonds as they mature.
The "so what" factor here is significant. Russia is the world's third largest financial power and a decision to reduce their dollar denominated holdings of Treasury obligations has sent the value of the dollar on foreign currency exchanges into a tailspin while simultaneously ramping-up market participants' concern regarding future supply issues. The timing of this event could not have been worse -- coming as it does in front of today's $19 billion 10-year note auction (scheduled conclusion at 1:00 p.m. ET) and tomorrow's $30 billion 30-year bond offering. The announced retreat of a major buyer from our domestic credit markets -- as the government continues to make plans to obliterate all standing records for debt issuance -- is a glaringly obvious impediment to the prospects for notably lower mortgage interest rates.
To tell readers of this commentary that the Mortgage Bankers of America announced earlier that spiking interest rates have driven down total home loan applications -- is like telling a brand new mother about the birth of her child. She was there - and was very directly involved - so what's to tell? In any case, the MBA said their seasonally adjusted index of total applications dropped 7.2% during the week ended June 5th. The refinance index slumped 11.8% while the purchase index posted a modest 1.1% increase. The average 30-year fixed-rate mortgage rate jumped 32 basis points to 5.57%.
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