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Conference nyoss1::market_investing

Title:	Market Investing

Moderator:	2155::michaud

Created:	Thu Jan 23 1992
Last Modified:	Thu Jun 05 1997
Last Successful Update:	Fri Jun 06 1997
Number of topics:	1060
Total number of notes:	10477

335.0. "What makes T-BILL rates tick?" by RANGER::GORCZYCA (PATHWORKS/NetWare Product Manager) Mon Dec 21 1992 16:08

I'm contemplating giving up my 9% fixed rate mortgage for a 4.75% variable
mortgage that can rise to a max of +6% (10.75) at a max of 2%/year.  Pretty
standard stuff.  This loan comes with a margin of 2.5% over the average 
T-BILL rate for a couple of months around the yearly anniversary of the loan.
Again, pretty standard stuff.

My problem is that I have no idea how the T-BILL rate varies, thus I don't 
really know what kind of a chance I'm taking to refinance now.

For example, if (when?) inflation goes up a couple of points, what will happen
to the T-BILL rates...or isn't it that "simple"?

Obviously, I need to guesstimate how likely it is that the T-BILL rates will
quickly rise to 6.5% or more...and stay there, in order to make some kind of
intelligent decision.

Is there any "standard wisdome" out there that says that "the T-BILL rate should
be at about 7.0% when the economy is healthy/normal" or even that is saying,
"the T-BILL rate has been held back in an abnormal fashion for 3 years now and
will have to swing much higher "to make things even out""?

Is it just a crap-shoot, or is it fairly predictable (at this point) what one
should expect to happen with the T-BILL rates?

(For example, I'm expecting inflation to rise a couple of % in the next year or
so and most interest rates to go up "a bit".  But, I don't know if T-BILLs
fluctuate as much as other rates, or what.)

Anyhow, any opinion, information, or insight, biased or otherwise, would be
appreciated.

Thanks,
John

T.R	Title	User	Personal Name	Date	Lines
335.1	Why an ARM?	STAR::BOUCHARD	The enemy is wise	`Mon Dec 21 1992 17:18`	6
	With fixed-rate mortgages at almost the lowest level in decades I wouldn't generally think that a conversion to an ARM would be a good idea, unless you can do this with almost no closing costs and you only plan to hold the new mortgage for a short period of time. Nobody can truly accurately predict future rates, of course, but they sure look low to me today!
335.2	Why...	RANGER::GORCZYCA	PATHWORKS/NetWare Product Manager	`Mon Dec 21 1992 17:42`	23
	RE: .1 WHY? Well, maybe because I'm old and cheap. When I was younger, I used to walk 4 miles to school in the snow..., oh, that's another story. When I was younger, mortgage rates were in the 7-7.5% range while bank savings deposit interest rates were 5%. So fixed rates in the 8.75% range just don't sound that low to me, especially with savings rates in the 2-3% range. I just don't want to be caught in the old thinking that fixed is good, when it may be that ARMs are both fair and maybe better. For example, maybe banks are still afraid of giving fixed rates that are "reasonable", but are more willing to give ARMs that are "reasonable" for BOTH them and the consumer...I don't know. I do appreciate your viewpoint though...I'm not sure that 8.75% is all that bad, it's just that 4.75% looks much better. JOHN
335.3	Be careful	KYOA::LAZARUS	David Lazarus @KYO,323-4353	`Wed Dec 23 1992 13:29`	9
	As one who had an ARM and saw it go all over the place,let me tell you-short rates are volatile! Although short rates appear to be quite favorable over long rates,be aware thast the adjustable amortization schedule is recalced every year using a method that tends to cost you $50 a month over the preferable method. Banks in the second year run a 29 year amort schedule instead of doing a 30 and having you pay year 2. All in all if you can switch with little or no points ,then do it but otherwise....tread carefully.
335.4	Go for the ARM	VMSDEV::HALLYB	Fish have no concept of fire.	`Wed Dec 23 1992 15:10`	11
	> Obviously, I need to guesstimate how likely it is that the T-BILL rates will > quickly rise to 6.5% or more...and stay there, in order to make some kind of > intelligent decision. This is exceedingly unlikely. It would almost require the FED to hike interest rates repeatedly, and is just not in the cards. High interest rates choke the economy, thus precipitating low interest rates...as long as you have an inflation-fighting FED, anyway. If Greenspan is replaced then the game changes. John
335.5	First off, forget that 4.75% rate, because	CSSE::NEILSEN	Wally Neilsen-Steinhardt	`Mon Jan 25 1993 15:48`	17
	it is probably just a loss-leader. A 4% T-bill rate is a reasonable guess for 1994, and that would put you at 6.5% next year. >My problem is that I have no idea how the T-BILL rate varies, thus I don't >really know what kind of a chance I'm taking to refinance now. The T-bill rate varies all over the place, from about 3% to about 15% in the twenty years or so I have been watching it. I think the max was about 18% in the 1970s, but I would have to look it up. Averaged over several years, the T-bill rate seems to hover around 1-2% above the inflation rate. This means that if you consider 5% inflation probable, you can also consider a 7% T-bill rate probable. I'll agree with John that this won't happen soon, but you have to think about how long you expect to hold your mortgage. Three years from now we could have a much different situation.