End of Tax Selling and Mortgage Rate Divergence

This past week had lots of financial news concerning the Fed monetary easing called QE2 where the Federal Reserve is puchasing longer term US treasury bonds. What was not in the news has to do with end of year selling and a Mortgage rate divergence that has never happened before and should never happen again, which I will explain. First is the weekly recap from Vanguard.

Vanguard

Following last week's upbeat jobs report, the U.S. economy continued to show signs of improvement. In a relatively light week for economic news, the trade deficit narrowed in September and initial jobless claims hit their lowest level since July. For the week, the S&P 500 Index fell 2.2% to 1,199 (for a year-to-date total return—including price change plus dividends—of about 9.4%). The yield of the 10-year U.S. Treasury note rose 18 basis points to 2.76% (for a year-to-date decrease of 109 basis points).

End of Year Tax Selling

The US stock market dropped this week and experts on the news were trying to explain it and how it relates to many things like QE2. Quite frankly, I believe the reason was end of year tax selling which is probably going to be heavier than normal this year. This applies if you have a brokerage account, it does not apply to an IRA account or 401(k) account, just a brokerage account.

Every year about this time people sell assets, like stocks or mutual funds, that have lost money so that they can write it off on their taxes. If the person wants to purchase the same asset they have to wait 31 days to repurchase it to avoid the wash sale rule. If you sell and buy it back within 30 days this is call a wash sale and for tax purposes the loss can not be deducted. So people tend to start to sell mid November and buy back mid December to reduce their taxable income.

This year I believe the end of year selling will be much higher due to the uncertainty of extending the Bush tax cuts. As it stands today any capital gain on an asset, like a stock or mutual fund, will be taxed at a higher capital gain tax rate next year. So to reduce the amount of taxes paid assets are being sold now to get a lower tax rate.

What this means is that between now and the end of the year the stock market should have some volatility. For a long term investment this is noise. If you have a short term time horizon you should becoming more conservative.

Mortgage Rate Divergence

Put this date down in the record book, Thursday November 11,2010 something happened that had never happened before. It is so exciting to see a once in a life time event, I wonder why the media didn't cover it more. Here is the big news, the interest rate on a 30 year mortgage was lower than the interest on a 30 year US Treasury bond. Wow wasn't that exciting!!!

This means it is cheaper to borrow from your house than the US Government. This has never happened because of how the mortgage game works. If you want to get a mortgage the provider will purchase a US Treasury bond of the same duration and amount, usually about 1% lower than the mortgage rate. So if the mortgage rate is 5% the mortgage provider has purchased a US Treasury bond at about 4% and that is why they provided the mortgage. This is big business and 1% of $1 Trillion is $10 Billion.

The reason it happened has to do with QE2 and the purchasing of longer term bonds and the time gap between when the US Treasury bond is bought and when the mortgage is converted. Since this has happened, either mortgage rates are going to go up, US Treasury rates are going to go down or both. Probably both is my belief.

When dealing with the Federal Reserve never bet against their policy since they hold the money. This tells me that interest rates are not rising anytime soon. It also tells me that now is a great time to refinance a mortgage as this divergence can not last long. No mortgage provider will stay in business to lose money.

Veterans Day Trivia

Veterans Day is always observed on Nov. 11 with speeches and parades across the U.S. The holiday began as Armistice Day on Nov. 11, 1919, the first anniversary of the end of World War I.

•In 1926, Congress passed a resolution for an annual observance.
•In 1938, Nov. 11 became a national holiday.
•In 1954, President Dwight D. Eisenhower signed legislation changing the name to Veterans Day in order to honor veterans of all American wars.

There were 21.9 million military veterans in the U.S. in 2009. Of those:

•1.5 million were female.
•2.3 million were black.
•1.1 million were Hispanic.
•9.2 million were 65 and older, according to 2008 figures.
•1.9 million were younger than 35, in 2008.

If you know a Veteran, thank them.