Frequently Asked Questions About the Home Buyer Tax Credit
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
1. Who is eligible to claim the tax credit?
2. What is the definition of a first-time home buyer?
3. How is the amount of the tax credit determined?
4. Are there any income limits for claiming the tax credit?
5. What is "modified adjusted gross income"?
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
7. Can you give me an example of how the partial tax credit is determined?
8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
9. How do I claim the tax credit? Do I need to complete a form or application?
10. What types of homes will qualify for the tax credit?
11. I read that the tax credit is "refundable." What does that mean?
12. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
13. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
14. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
15. I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
16. I am not a U.S. citizen. Can I claim the tax credit?
17. Is a tax credit the same as a tax deduction?
18. I bought a home in 2008. Do I qualify for this credit?
19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
20. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
21. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.
What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.
If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?
The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.
What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.
Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.
The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.
Finally, HUD’s publication of Mortgagee Letter 2009-15 allows FHA-approved lenders to issue short-term loans to advance the credit amount for use in purchasing the home.
If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
Thursday, May 14, 2009
Monday, May 11, 2009
Mortgages Over 5% Mean Fed Purchases as Bonds Slump (Update2)
By Daniel Kruger
May 11 (Bloomberg) -- The world’s biggest investors are increasing bets that Federal Reserve Chairman Ben S. Bernanke will boost purchases of Treasuries as the steepest losses on government debt since 1994 send mortgage rates above 5 percent.
The slump in Treasuries the past seven weeks pushed yields on longer-maturity bonds up by more than half a percentage point and sent average rates on 30-year mortgages to the highest since the start of April, according to North Palm Beach, Florida-based Bankrate.com. Policy makers said March 18 they were committing “greater support to mortgage lending and housing markets” when they pledged to buy as much as $300 billion of Treasuries and stepped up purchases of bonds backed by home loans.
BlackRock Inc., American Century Investments, Federated Investors and Pioneer Investment Management say it’s time to buy Treasuries because the Fed will need to expand its purchases to keep consumer borrowing costs from rising further. While higher bond yields, the 37 percent increase in the Standard & Poor’s 500 Index since March 9 and U.S. reports on housing and inventories show the economy may be stabilizing, Bernanke said May 5 that “mortgage credit is still relatively tight.”
“The Fed needs to consider increasing its purchases of Treasuries,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, which manages $483 billion in debt. Spodek said he resumed buying Treasuries. “We are still in a recession. It’s quite bad. They need to stabilize long-term rates.”
Fed Precedent
Reviving the housing market is critical to ending the longest recession since the 1930s. The National Association of Home Builders says the industry accounted for 13.6 percent of U.S. gross domestic product in the first quarter of 2009, down from 16.7 percent in 2005. GDP contracted at a 6.1 percent rate last quarter after shrinking at a 6.3 percent pace in the final three months of 2008.
There is precedent for the central bank to expand purchases. The Fed increased its commitment to buy mortgage bonds to $1.25 trillion in March from $500 billion when it said it would begin buying government debt in a policy known as quantitative easing.
“We think there’s a point very close to here where the Fed would act,” said James Platz, a fund manager at Mountain View, California-based American Century, which invests about $24 billion in bonds and resumed buying Treasuries. “We would expect at some point an announcement of additional buybacks.”
The Fed purchased $92.2 billion of Treasuries since the March 18 announcement, according to data compiled by Bloomberg.
Losing Streak
At the same time, 10-year note yields, a benchmark for consumer and mortgage rates, reached 3.38 percent last week, the highest since November and up from 2.46 percent on March 19, according to BGCantor Market data. Thirty-year mortgage rates are up from 4.85 percent on April 28.
Yields rose for seven weeks, the longest streak in five years. The benchmark 3.125 percent note due in May 2019, which was auctioned by the Treasury on May 6, ended last week at 98 20/32 to yield 3.29 percent. The yield declined to 3.21 percent today at 9:32 a.m. in New York.
Treasuries lost 3.93 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, after gaining 14 percent in 2008 as investors sought a refuge from tumbling prices of securities tied to subprime mortgages. Losses and writedowns at the world’s largest financial institutions total $1.41 trillion since the start of 2007, Bloomberg data show.
‘Tight’ Credit
The declines are the most since Treasuries tumbled 4.94 percent at the same point in 1994, according to Merrill Lynch indexes. That year, the Fed raised its target rate for overnight loans between banks to 5.5 percent from 3 percent in an effort to contain inflation. Treasuries ended up losing 3.35 percent for all of 1994, before returning 18.5 percent in 1995 and 2.61 percent in 1996, including reinvested interest.
Thirty-year mortgage rates as measured by Freddie Mac rose to 9.25 percent on November 1994, from 6.74 percent in 1993, before falling to 6.94 percent in February 1996.
Home prices have declined for 31 straight months and are down 31 percent from their peak, according to S&P/Case Shiller indexes. Mortgage applications to purchase a home remain below the high reached in September when rates averaged 5.94 percent, Mortgage Bankers Association and Bankrate.com data show.
“The supply of mortgage credit is still relatively tight, and mortgage activity remains heavily dependent on the support of government programs or the government-sponsored enterprises,” Bernanke told the Joint Economic Committee of Congress on May 5.
Thawing the Freeze
Bernanke succeeded in narrowing the difference in yields between mortgage securities, which also influence home loan rates, and Treasuries.
The gap between the 30-year current coupon Fannie Mae bond and the benchmark 10-year Treasury shrank to a 15-year low of 0.77 percentage point on May 6. It averaged 1.23 percentage points in the five years prior to the collapse of Lehman Brothers Holdings Inc. in September. Thirty-year mortgage rates are down from 6.46 percent in October.
Other lending rates also show Fed efforts to thaw frozen credit markets are working, which may reduce pressure on policy makers to step up purchases of Treasuries.
The London interbank offered rate, or Libor, for three- month dollar loans fell to a record 0.92 percent. The difference between Libor and what the Treasury pays to borrow for three months, the so-called TED spread, was 0.72 percentage point, the narrowest in almost a year and down from 4.64 percentage points on Oct. 10.
Bond Switch
Investors anticipating an expansion of the Fed’s Treasury purchases were disappointed after the Federal Open Market Committee’s April 29 meeting, when policy makers left the size of planned buybacks unchanged and said the economy is showing signs of stability. Yields on 10-year notes rose 16 basis points, or 0.16 percentage point, to 3.16 percent that week, the biggest increase since the period ended Feb. 27.
Treasuries are falling in part because investors are switching to higher-yielding assets on signs the worst of the recession is over.
Unemployment in the U.S. grew by the smallest amount since October last month. Payrolls fell by 539,000, after a 699,000 loss in March, while the unemployment rate rose to 8.9 percent, the highest level since 1983, the Labor Department said May 8. The Commerce Department said the same day wholesalers reduced supplies of unsold goods for a seventh month in March.
Corporate Debt Sales
“People are feeling a little bit more comfortable that the economy is not getting as bad as it was,” said Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investment in Boston. “There has been a slight migration out of the safe-haven mentality.”
Besides the gain in stocks and the drop in the rate banks charge to lend to each other, U.S. companies including New York- based Morgan Stanley and Bank of America Corp. in Charlotte, North Carolina, have sold more than $500 billion of bonds, according to Bloomberg data.
There is still plenty of incentive for Bernanke to contain borrowing costs as job losses threaten to restrain consumer spending after a first-quarter rebound, according to economists surveyed by Bloomberg News last month.
The government is likely to sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., to finance bank bailouts, economic stimulus plans and fund a growing budget deficit.
Consumer credit in the U.S. contracted by a record $11.1 billion, the most since records began in 1943, to $2.55 trillion in March, according to a Fed report released May 7.
“If all of a sudden this rise in the 10-year yield feeds into higher all-in mortgage rates, that’s when we think the Fed will come in with a vengeance” to increase its Treasury purchases, said Joseph Balestrino, a money manager at Federated Investors in Pittsburgh, which oversees $21 billion in bonds. “We are a buyer.”
To contact the reporter on this story: Daniel Kruger in New York at dkkruger1@bloomberg.net.
May 11 (Bloomberg) -- The world’s biggest investors are increasing bets that Federal Reserve Chairman Ben S. Bernanke will boost purchases of Treasuries as the steepest losses on government debt since 1994 send mortgage rates above 5 percent.
The slump in Treasuries the past seven weeks pushed yields on longer-maturity bonds up by more than half a percentage point and sent average rates on 30-year mortgages to the highest since the start of April, according to North Palm Beach, Florida-based Bankrate.com. Policy makers said March 18 they were committing “greater support to mortgage lending and housing markets” when they pledged to buy as much as $300 billion of Treasuries and stepped up purchases of bonds backed by home loans.
BlackRock Inc., American Century Investments, Federated Investors and Pioneer Investment Management say it’s time to buy Treasuries because the Fed will need to expand its purchases to keep consumer borrowing costs from rising further. While higher bond yields, the 37 percent increase in the Standard & Poor’s 500 Index since March 9 and U.S. reports on housing and inventories show the economy may be stabilizing, Bernanke said May 5 that “mortgage credit is still relatively tight.”
“The Fed needs to consider increasing its purchases of Treasuries,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, which manages $483 billion in debt. Spodek said he resumed buying Treasuries. “We are still in a recession. It’s quite bad. They need to stabilize long-term rates.”
Fed Precedent
Reviving the housing market is critical to ending the longest recession since the 1930s. The National Association of Home Builders says the industry accounted for 13.6 percent of U.S. gross domestic product in the first quarter of 2009, down from 16.7 percent in 2005. GDP contracted at a 6.1 percent rate last quarter after shrinking at a 6.3 percent pace in the final three months of 2008.
There is precedent for the central bank to expand purchases. The Fed increased its commitment to buy mortgage bonds to $1.25 trillion in March from $500 billion when it said it would begin buying government debt in a policy known as quantitative easing.
“We think there’s a point very close to here where the Fed would act,” said James Platz, a fund manager at Mountain View, California-based American Century, which invests about $24 billion in bonds and resumed buying Treasuries. “We would expect at some point an announcement of additional buybacks.”
The Fed purchased $92.2 billion of Treasuries since the March 18 announcement, according to data compiled by Bloomberg.
Losing Streak
At the same time, 10-year note yields, a benchmark for consumer and mortgage rates, reached 3.38 percent last week, the highest since November and up from 2.46 percent on March 19, according to BGCantor Market data. Thirty-year mortgage rates are up from 4.85 percent on April 28.
Yields rose for seven weeks, the longest streak in five years. The benchmark 3.125 percent note due in May 2019, which was auctioned by the Treasury on May 6, ended last week at 98 20/32 to yield 3.29 percent. The yield declined to 3.21 percent today at 9:32 a.m. in New York.
Treasuries lost 3.93 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, after gaining 14 percent in 2008 as investors sought a refuge from tumbling prices of securities tied to subprime mortgages. Losses and writedowns at the world’s largest financial institutions total $1.41 trillion since the start of 2007, Bloomberg data show.
‘Tight’ Credit
The declines are the most since Treasuries tumbled 4.94 percent at the same point in 1994, according to Merrill Lynch indexes. That year, the Fed raised its target rate for overnight loans between banks to 5.5 percent from 3 percent in an effort to contain inflation. Treasuries ended up losing 3.35 percent for all of 1994, before returning 18.5 percent in 1995 and 2.61 percent in 1996, including reinvested interest.
Thirty-year mortgage rates as measured by Freddie Mac rose to 9.25 percent on November 1994, from 6.74 percent in 1993, before falling to 6.94 percent in February 1996.
Home prices have declined for 31 straight months and are down 31 percent from their peak, according to S&P/Case Shiller indexes. Mortgage applications to purchase a home remain below the high reached in September when rates averaged 5.94 percent, Mortgage Bankers Association and Bankrate.com data show.
“The supply of mortgage credit is still relatively tight, and mortgage activity remains heavily dependent on the support of government programs or the government-sponsored enterprises,” Bernanke told the Joint Economic Committee of Congress on May 5.
Thawing the Freeze
Bernanke succeeded in narrowing the difference in yields between mortgage securities, which also influence home loan rates, and Treasuries.
The gap between the 30-year current coupon Fannie Mae bond and the benchmark 10-year Treasury shrank to a 15-year low of 0.77 percentage point on May 6. It averaged 1.23 percentage points in the five years prior to the collapse of Lehman Brothers Holdings Inc. in September. Thirty-year mortgage rates are down from 6.46 percent in October.
Other lending rates also show Fed efforts to thaw frozen credit markets are working, which may reduce pressure on policy makers to step up purchases of Treasuries.
The London interbank offered rate, or Libor, for three- month dollar loans fell to a record 0.92 percent. The difference between Libor and what the Treasury pays to borrow for three months, the so-called TED spread, was 0.72 percentage point, the narrowest in almost a year and down from 4.64 percentage points on Oct. 10.
Bond Switch
Investors anticipating an expansion of the Fed’s Treasury purchases were disappointed after the Federal Open Market Committee’s April 29 meeting, when policy makers left the size of planned buybacks unchanged and said the economy is showing signs of stability. Yields on 10-year notes rose 16 basis points, or 0.16 percentage point, to 3.16 percent that week, the biggest increase since the period ended Feb. 27.
Treasuries are falling in part because investors are switching to higher-yielding assets on signs the worst of the recession is over.
Unemployment in the U.S. grew by the smallest amount since October last month. Payrolls fell by 539,000, after a 699,000 loss in March, while the unemployment rate rose to 8.9 percent, the highest level since 1983, the Labor Department said May 8. The Commerce Department said the same day wholesalers reduced supplies of unsold goods for a seventh month in March.
Corporate Debt Sales
“People are feeling a little bit more comfortable that the economy is not getting as bad as it was,” said Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investment in Boston. “There has been a slight migration out of the safe-haven mentality.”
Besides the gain in stocks and the drop in the rate banks charge to lend to each other, U.S. companies including New York- based Morgan Stanley and Bank of America Corp. in Charlotte, North Carolina, have sold more than $500 billion of bonds, according to Bloomberg data.
There is still plenty of incentive for Bernanke to contain borrowing costs as job losses threaten to restrain consumer spending after a first-quarter rebound, according to economists surveyed by Bloomberg News last month.
The government is likely to sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., to finance bank bailouts, economic stimulus plans and fund a growing budget deficit.
Consumer credit in the U.S. contracted by a record $11.1 billion, the most since records began in 1943, to $2.55 trillion in March, according to a Fed report released May 7.
“If all of a sudden this rise in the 10-year yield feeds into higher all-in mortgage rates, that’s when we think the Fed will come in with a vengeance” to increase its Treasury purchases, said Joseph Balestrino, a money manager at Federated Investors in Pittsburgh, which oversees $21 billion in bonds. “We are a buyer.”
To contact the reporter on this story: Daniel Kruger in New York at dkkruger1@bloomberg.net.
Friday, May 1, 2009
Friday May 1st 2009
Mortgage Bonds are trading lower today after failing to stay above support at the
25-day Moving Average. A look at yesterday's candle on the Bond Page
shows both long upper and lower wicks, illustrating wild intra-day trading. Prices
bounced around, hitting both the 25-day MA ceiling of resistance, and support at
the 50 and 100-day Moving Averages.
But so far this morning, although lower, Bond prices have successfully tested a
triple layer floor of support, marked by the 50 and 100-day Moving Averages, as
well as some previous lows. This strong floor of support could help prices from
getting much worse, but it is important to remember that there is a lot of influential
news coming next week, along with huge supply of Bonds being auctioned, which
could push prices below this strong floor. And if prices do break beneath this floor,
we will likely see another 75bp deterioration before the next level of support is
found. That said, we will Float for now, as we watch to see if this strong triple layer
of support holds.
Stocks are slightly lower so far this morning, but they did post strong gains in
April. In fact, the S&P 500 had its best month in nine years, gaining 9.4%, led by
the financial sector and thanks to Congress and FASB for fixing Mark-to-Market.
Speaking of the financial sector, the Fed is going to delay releasing the banking
stress test results. It appears that there may be some discussion as to the
conclusions of the findings, as well as how the information is released to the
public. It's always difficult to speculate as to the exact reasons why this delay
would take place, but it is possible that this open dialog shows a willingness for both
sides to get this right.
The New York Fed reported that it purchased $23B in Mortgage Backed Securities
from April 23 through April 29 bringing the year-to-date total to $400B out of the
$1.25T. Of note, the Fed did for the first time purchase FNMA 3.5% Bonds - but the
amount purchased was miniscule and insignificant. We will be seeing if the Fed
dips in to buy more 3.5% Bonds as that could help rates improve modestly from
these levels.
Yesterday, the Economic Cycle Research Institute (ECRI) said that the current
recession and longest post war will probably end by the time the summer is over.
The ECRI, whose leading indicators have a solid track record of predicting turns in
the business cycle, said that enough of its key gauges have turned upward to
indicate with certainty that a recovery is coming. This is comforting news and yet
another reason why mortgage rates are not likely to improve significantly.
Consumer Sentiment came in at 65.1, a bit better than the expected 61.9. As we
have been saying, this appears to be a result of the improvement in Stock prices.
Additionally, the Institute of Supply Management (ISM) Index arrived at 40.1, also
better than expectations of 38.4.
As we've mentioned, keep your eye on the S&P500 Index, which is at a pivotal
juncture around 875. A convincing move above this level could push Stocks higher
by another 8%, but a failure to break this level could trigger a sell-off of at least 5%.
And as we know, this will likely have an influence on Mortgage Bonds.
25-day Moving Average. A look at yesterday's candle on the Bond Page
shows both long upper and lower wicks, illustrating wild intra-day trading. Prices
bounced around, hitting both the 25-day MA ceiling of resistance, and support at
the 50 and 100-day Moving Averages.
But so far this morning, although lower, Bond prices have successfully tested a
triple layer floor of support, marked by the 50 and 100-day Moving Averages, as
well as some previous lows. This strong floor of support could help prices from
getting much worse, but it is important to remember that there is a lot of influential
news coming next week, along with huge supply of Bonds being auctioned, which
could push prices below this strong floor. And if prices do break beneath this floor,
we will likely see another 75bp deterioration before the next level of support is
found. That said, we will Float for now, as we watch to see if this strong triple layer
of support holds.
Stocks are slightly lower so far this morning, but they did post strong gains in
April. In fact, the S&P 500 had its best month in nine years, gaining 9.4%, led by
the financial sector and thanks to Congress and FASB for fixing Mark-to-Market.
Speaking of the financial sector, the Fed is going to delay releasing the banking
stress test results. It appears that there may be some discussion as to the
conclusions of the findings, as well as how the information is released to the
public. It's always difficult to speculate as to the exact reasons why this delay
would take place, but it is possible that this open dialog shows a willingness for both
sides to get this right.
The New York Fed reported that it purchased $23B in Mortgage Backed Securities
from April 23 through April 29 bringing the year-to-date total to $400B out of the
$1.25T. Of note, the Fed did for the first time purchase FNMA 3.5% Bonds - but the
amount purchased was miniscule and insignificant. We will be seeing if the Fed
dips in to buy more 3.5% Bonds as that could help rates improve modestly from
these levels.
Yesterday, the Economic Cycle Research Institute (ECRI) said that the current
recession and longest post war will probably end by the time the summer is over.
The ECRI, whose leading indicators have a solid track record of predicting turns in
the business cycle, said that enough of its key gauges have turned upward to
indicate with certainty that a recovery is coming. This is comforting news and yet
another reason why mortgage rates are not likely to improve significantly.
Consumer Sentiment came in at 65.1, a bit better than the expected 61.9. As we
have been saying, this appears to be a result of the improvement in Stock prices.
Additionally, the Institute of Supply Management (ISM) Index arrived at 40.1, also
better than expectations of 38.4.
As we've mentioned, keep your eye on the S&P500 Index, which is at a pivotal
juncture around 875. A convincing move above this level could push Stocks higher
by another 8%, but a failure to break this level could trigger a sell-off of at least 5%.
And as we know, this will likely have an influence on Mortgage Bonds.
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