LARRY HUNGERFORD

Larry Hungerford

Would you lend money to Uncle Sam for 30 years for under 2%? Not me! If the Fed is successful at achieving its target rate of 2% for the next three decades, your return in real inflation-adjusted dollars would be zilch.

For the first time ever, the 30-year bond closed under 2% (1.99%) Aug. 14 and then set another new all-time low the next day at 1.98%. However, for most of the Aug. 14 trading day, the two-year Treasury Bill was paying slightly more than the 10-year Treasury Note, creating an inverted yield curve. (They both ended the day yielding 1.58%.)

(As I write this column on Aug. 20, the two-year is yielding 1.51%, the 10-year rate is at 1.56%, and the 30-year is paying 2.05%.)

An inverted yield is when a short-term treasury yields more than a longer-term treasury. Because inverted yield curves almost always predict recessions, the temporary inversion Aug. 14 frightened investors.

Two other discouraging examples of the weakening world economy reported that day were Germany’s lousy minus 0.1% GDP growth for the second quarter and China’s worst monthly industrial output since 2002. (Worldwide industrial growth grew at a solid 4% early in 2018, now it is under 1%!)

The temporary inverted yield curve and the bad news from Germany and China on Aug. 14 caused U.S. stocks to sell off 3%. It was the worst day of the year for investors — the Dow tanked 800 points.

For the last four decades, each of the five times there has been an inverted yield curve a recession has followed: in the years of 2008-09, 2001, 1990-91, 1983 and 1980. Yet these recessions did not begin until an average of 22 months after the yield curve first inverted. Plus, U.S. stocks have then averaged a 13% return for the 12 months after the first inversion.

Janet Yellen, former Federal Reserve Chair, reacted: “I think the U.S. economy has enough strength to avoid a recession, but the odds have clearly risen and they are higher than I am frankly comfortable with.”

I think the earliest we could have a recession is the last half of 2021. Wages and salaries are now rising the fastest in 10 years — 5.5% growth over the past 12 months — and the unemployment rate is near 50-year lows. Retail spending just recorded its best five-month growth streak since 2006. For example, retail-giant Walmart earlier this month reported terrific second-quarter sales and profits.

Low oil prices and falling interest rates are also contributing to a confident American consumer — consumer spending accounts for almost 70% of the U.S. economy.

I believe the primary reason for the inverted yield curve Aug. 14 is that money from foreign buyers is flooding into U.S. treasuries. Our interest rates, despite their recent decline, are still higher than those of most other wealthy countries.

When the 10-year U.S. treasury closed at 1.58% Aug. 14, the 10-year percentage rates for other government bonds were: Italy (1.51), Australia (0.95), United Kingdom (0.46), Spain (0.14) and three countries — Japan (-0.22), France (-0.37) and Germany (-0.65) — all had negative rates. (My son, Steve, wrote about negative rates in his column here two weeks ago.)

There is no doubt that the world economy is weakening. More than 30 countries’ central banks have cut interest rates this year to help spur economic growth. (Germany announced last Monday that it was spending as much as $55 billion to stimulate its economy.)

Our Fed lowered rates by one-quarter percent July 31 and will undoubtedly cut again when it meets Sept. 17-18 and then perhaps one more time at its October or December meeting.

The new extremely low rates are a terrific incentive for many homeowners to refinance. As of last Tuesday, the best 30 year-rate for home loans was about 3% while the 15-year loan was near 3¼%. (Last fall, 30-year mortgage rates were 5%.)

My advice is to consider refinancing with a 15-year loan if you can afford the somewhat higher payments. Given the new high $24,000 standard deduction and the limited deductibility of $10,000 for state and local taxers, many homeowners no longer benefit from the mortgage deduction.

The new lower rates are good news for homebuilders and home buyers. It is estimated that for each 0.25% interest-rate decline, purchasers can qualify to borrow about 3% more. For example, if you were preapproved by a mortgage lender for a $200,000 30-year loan last fall when rates were 5%, you are now able to borrow $227,000 at the current 3 5/8 rate.

One reason many homeowners avoid refinancing is the paperwork hassle. I haven’t refinanced for more than a decade, but I remember how time consuming it was to secure the paperwork needed.

Online sites such as Quicken’s Rocket Mortgage and Lending Tree claim that the process is more streamlined now.

Typical requirements to refinance a loan include; (1.) two years of employment history, (2.) a tax return or W-2 from last year, (3.) a current pay stub, (4.) two months of bank statements, (5.) a home appraisal, and (6.) a credit report. It often takes a 740 credit score or better to secure the very best rate.

Another option for homeowners that lowers the usual 1.5-2.0% mortgage closing costs to $700 or less and requires less paperwork is a home equity line of credit (HELOC).

At BB&T (soon to become Truist), you may borrow up to 80% of your home equity value at a current variable rate as low as of 3.99% and a fixed rate of 4.5%. However, HELOC interest payments are only tax-deductible if the loan proceeds are used to fix up your home.

Also, don’t forget to consider refinancing your car loan (no closing costs). The current rate at BB&T is 3.4% for repayments of 48 months or less.

While online lenders such as Rocket Mortgage and Lending Tree may appeal to many homeowners considering refinancing, it is my belief that their rates tend to be slightly higher than local mortgage brokers.

Like most seniors, my bias is to avoid the faceless internet and work face-to-face with a hometown individual. However, whatever you decide, it certainly is wise to get several bids to secure the lowest rate.

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