Gyroscopic Investing

Deleted

Gross is a thoughtful guy and clearly has a good track record as a bond fund manager, but I'll put my crystal ball up against his any day and would bet A LOT that we will both be wrong.  Remember that this is the same Bill Gross who was within about 48 hours of seeing a HUGE chunk of his GSE holdings become worthless in 2008--his crystal ball must have been in the shop that week.

I think he is setting up some kind of trade and this change of tone is just part of the strategy to talk the market in the direction he wants it to go.

The whole narrative of "when QEII ends bond yields are going to rise" is just speculation.  Remember what happened back at the end of QE1?  Yields promptly dropped...a lot.

All I know for sure is that if 10 year yields rise too quickly, the U.S. mortgage market will basically come to a standstill, which means that the housing decline will likely resume, which means that the economy will all of the sudden start looking crappy again, which will tend to push 10 year yields down again.

I'm glad I don't have to make my living delivering these carefully hedged predictions to the market and then either forgetting them or creatively reinterpreting them to make it look like I knew what I was talking about all along.

I make a few predictions here for pure entertainment and I may be right and I may be wrong, but with the PP I am free to engage in these parlor games and no one gets hurt.

Another thing to remember when thinking about 30 year yields is that we are still in a secular bull market for treasury bonds.  Secular bulls tend to go on longer than anyone would have ever imagined they could and tend to end in blowoff tops and proclamations that things are different this time.  So far, I have seen nothing like this with long term treasurys.  Most Americans own ZERO treasurys.

My prediction is that the secular bull market in treasurys will end with long term rates between 2.15% and 2.35%, and it won't end for at least a few more years.

IMHO, in a year the idea of 30 year yields at 6% will seem comical and Bill Gross will have moved through at least two or three more bond market narratives.

I tend to agree with you, but man 2.35% is even lower than when people were thinking the economy was going to collapse at the end of 2008.

Do you allow your predictions to effect what duration mortgage you take?  For instance, if you thought deflation and low interest rates were going to be our future, you'd be more likely to do an ARM or 15 year mortgage than stick with 30-year fixed.

Here is some more noise to counter Gross's noise:

Middle East war --> bullish for treasurys

Stock market rolls over --> bullish for treasurys

Republican House forces significant budget cuts --> bullish for treasurys

Municipal bond market gets sick --> bullish for treasurys

Bond crisis in any of five or so euro countries --> bullish for treasurys

moda0306 wrote: Do you allow your predictions to effect what duration mortgage you take?  For instance, if you thought deflation and low interest rates were going to be our future, you'd be more likely to do an ARM or 15 year mortgage than stick with 30-year fixed.

Let's think that through:

If I am right and yields will fall some more, all I need to do is wait and refinance to a lower fixed rate when they do.  If I am wrong, then my current 4.25% 15 year fixed rate will help keep me warm at night.

I don't do 30 year mortgages under any circumstances, so that's not an option in any case (though I did spend a few years with a cute and well-priced 20 year note a while back  ).

IMHO, there is no need for an ARM to benefit from the continued deleleveraging thesis.

MT,

You strike me as more of a 3.5% down 40 year Fixed FHA Jumbo on a McMansion type of guy myself.

moda0306 wrote: MT,

You strike me as more of a 3.5% down 40 year Fixed FHA Jumbo on a McMansion type of guy myself.

I have an allergy to debt that takes me more than two decades to pay off.

My current home is worth about 1.5 times my current salary, if that helps you gauge where my comfort level is.

MediumTex wrote: I have an allergy to debt that takes me more than two decades to pay off.

My current home is worth about 1.5 times my current salary, if that helps you gauge where my comfort level is.

I was kidding... I think I had you pretty well gauged as a 15 yr 20% downer.

Do you finance your vehicle purchases or anything else?

moda0306 wrote: Do you finance your vehicle purchases or anything else?

I try to have one payment between the two cars in our family.  My wife's vehicle is 7 years old and paid for; mine is 3 years old and will be paid for next year.

I have one credit card with a fixed 3.99% fixed rate for a balance transfer I did a year or so ago.

That's it for debt.  It used to be a lot worse.

any word on where pimco is parking all that $$$ ?

gold? TSM? ST?

MediumTex wrote:I don't do 30 year mortgages under any circumstances, so that's not an option in any case (though I did spend a few years with a cute and well-priced 20 year note a while back  ).

I'd be interested in hearing your reasoning here - I tend to view a fixed 30 as a slightly higher rate fixed-15 with an option for lower payments over a longer period.

fnord123 wrote:

MediumTex wrote:I don't do 30 year mortgages under any circumstances, so that's not an option in any case (though I did spend a few years with a cute and well-priced 20 year note a while back  ).

I'd be interested in hearing your reasoning here - I tend to view a fixed 30 as a slightly higher rate fixed-15 with an option for lower payments over a longer period.

I like paying less interest and paying off the note faster.

You can roll along with a 30 year note for 10 years and make almost no progress toward paying down the principal.

Some people don't really aspire to ever own anything--they just want to rent it a while and pocket the profit if it goes up in value.  I actually want to own my home, so I want to finance it in a way that will allow me to do that as quickly as possible and with as little interest expense as possible.

There's not a right answer to this question--this is just the way I think about it and do it.

I was brought up by parents who thought of debt as a toxic substance to be avoided if at all possible.  They learned that from their parents who grew up during the Depression.  While I am not as averse to debt as they are, I did pick up some of their habits.  When I purchased my home I got a 20 year mortgage, which I think strikes a nice balance.  I am now 5 1/2 years away from not having a mortgage.

But I agree that there is no right answer.  It really depends on what makes you comfortable.  I think that had I opted for the 30 year, most of the difference in monthly payments would likely have been frittered away rather than saved.  Others may be more disciplined that I am though.

Pkg Man wrote:I agree that there is no right answer.  It really depends on what makes you comfortable.

That about says it all. 

Folks who use marginal income to pay down their mortgage may not see the financial benefit (in terms of no more mortgage payment) for many years to come.  In the meantime, they may find it more advantageous to devote those funds to current needs.  Even later on, when the home is paid off, situations may arise requiring immediate use of funds.  What a shame if your assets are all tied up in your house.  Having to pay refi and interest costs just to access your OWN money is even less desirable than paying normal mortgage interest.  Come to think of it, the reverse mortgage industry was founded to take advantage of serve such people.

So that's one reason for choosing the flexibility of a 30-year mortgage.  To each his own.

To me, a 30 year mortgage is a lot more like renting than owning.

This reality was obscured during the housing bubble, but I think people are getting reacquainted with it.