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Strategies & Market Trends : Buy and Sell Signals, and Other Market Perspectives

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Jan 23 4:00 PM EST

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To: Jack of All Trades who wrote (40850)	11/27/2012 2:29:49 PM
From: Keith Feral	Read Replies (1) of 222344

There is no free lunch for the banks. The idea that a zero interest rate environment is a plus for banks couldn't be further from the truth. However, the low rate environment isn't hurting them either, since they are replacing long term debt at much lower rates from 6 to 8% down to 3 or 4%. Zero rates keep driving net interest margins lower, but I do see evidence from BAC that their efforts to reduce long term debt are creating a positive trend for net interest margins after 4 years. They have probably eliminated $100 billion in LT debt this year so they are finally seeing low net interest margins finally starting to turn higher after last quarter. Longer term, I really don't care if rates stay the same or move higher. The lower mortgage spread is just beginning to balance out near the lows, so there will probably be net interest margins improvements for the next year or two. But, the banks have certainly not enjoyed any advantage with mortgage spreads compressing since 2008. If the FED can figure out how to make rates work against the banks any further, my guess is they would attempt to tighten further. The only thing I could see them do is eliminate payment on excess reserves. They might not want to cut that tie with the banks just yet. In reality, though, there is nothing more the FED can do to punish banks more severe than leaving interest rates at zero for 8 years, which is the current plan. It would be blatantly unfair to the consumer if the FED starting jacking up interest rates today, as their personal balance sheets begin to improve like the banks in terms of loan contraction which are now financed by affordable long term rates around 3.5%. The taxpayer that is actually paying all the mortgage bills in this country still needs a couple more years to reap the full advantage of 3.5% mortgage environment, since banks just don't have the capacity to refi or modify everyone at one time. I hope mortgage rates never get much above 4% again. Too damned expensive for everyone.

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