Will people tire of the recession and call it's bluff???

[le roi]

Originally Posted by TexasNick

Can someone explane to me why mortgage rates are going up, when, money market interest rates are diving to historical lows?

Bond markets are cryptic to me.. but I will take a stab at it.

I would guess that people buying mortgage bonds are concerned about inflation right now, driving down demand for long-term debt, causing interest rates to rise.

It is my understanding that money market funds invest in extremely short-term debt, so therefore their bonds would not be discounted quite as severely during inflation.

[chet everett]

Originally Posted by TexasNick

Can someone explane to me why mortgage rates are going up, when, money market interest rates are diving to historical lows?

People move money INTO money markets at banks and other FDIC insured accounts because they are afraid of having it anywhere else. When banks get "an excess of deposit" they have no incentive to do anything other drop rates.

On the flip side, the yield on fixed income products that are EQUALLY safe, like T-Bills backed by the Treasury, is rising because (nut jobs) are afraid of inflation.

Those yields make investors that lender money for mortgages demand high interest rates -- that part actually DOES make sense because mortgages ARE riskier than T-Bills.

The Federal Reserve and the Treasury are acutely aware of the problems that will occur in the economy if rates rise and they have affirmed over and over and over that they will act to prevent DEFLATION as well as act to keep rates prudently low.

Investors have a lot of doubts about the Secretary of Treasury, timothy geithner - Google News, but so far he has not done anything to suggest he is rash or mad. He was head of the NY Federal Reserve Bank and has more first hand experience in 'calming markets' than basically any other living human...

The general news has been more favorable to the Fed Chief, ben bernanke - Google News, but his term is up in Jan 2010, and the White House will either reappoint him in the fall, or is right now trying to find someone more in line with their thinking...

BTW, if you went out and asked 1000 a random people what IS the White House thinking about the economy and interest rates and the 'stuff' that matters I suspect you would get about 1000 different answers. Too damn little clarity = too much uncertainity!

[doss1]

Ah, informative. Thanks.

[trickymost]

Originally Posted by chet everett

People move money INTO money markets at banks and other FDIC insured accounts because they are afraid of having it anywhere else. When banks get "an excess of deposit" they have no incentive to do anything other drop rates.

On the flip side, the yield on fixed income products that are EQUALLY safe, like T-Bills backed by the Treasury, is rising because (nut jobs) are afraid of inflation.

Those yields make investors that lender money for mortgages demand high interest rates -- that part actually DOES make sense because mortgages ARE riskier than T-Bills.

The Federal Reserve and the Treasury are acutely aware of the problems that will occur in the economy if rates rise and they have affirmed over and over and over that they will act to prevent DEFLATION as well as act to keep rates prudently low.

Investors have a lot of doubts about the Secretary of Treasury, timothy geithner - Google News, but so far he has not done anything to suggest he is rash or mad. He was head of the NY Federal Reserve Bank and has more first hand experience in 'calming markets' than basically any other living human...

The general news has been more favorable to the Fed Chief, ben bernanke - Google News, but his term is up in Jan 2010, and the White House will either reappoint him in the fall, or is right now trying to find someone more in line with their thinking...

BTW, if you went out and asked 1000 a random people what IS the White House thinking about the economy and interest rates and the 'stuff' that matters I suspect you would get about 1000 different answers. Too damn little clarity = too much uncertainity!

Excellent post.

I'll add for color commentary you are seeing the lack of confidence by foreign banks resulting in moving to the purchase of these less risky, short term bonds, driving the yield down because the demand is high.

It's very telling when China is willing to buy a bond with a near 0 percent return rather than risk the higher return on the long term bonds.

Further, China, who is currently buying over 60% of our bonds, said in December they will not do this forever, yet their warning is not being heeded by our government: AFP: China says lending to US will not go on forever

This could become more newsworthy with the MAJOR 10 and 30 yr bond auctions taking place this week starting tomorrow.

It is possible interest rates will go parabolic. It is also possible Ben B will spend a lot of money to drive them lower, although this would be another band-aid temporary solution.

This quote says it all: "The current strong foreign appetite should not be taken by the US government as solid proof of the long-term value of its Treasury bonds," it [China] said.

[chet everett]

I try to avoid the political aspect of these things, but the financial info is widely available and most interpretations are in pretty narrow range...

[DanInHSV]

I heard an interview with the famed Anna Schwartz recently. She did not like the Fed's moves to add liquidity by buying other than Treasuries since it's easy to mop up liquidity by selling the T bills off their balance sheet because its a deep market. With the billions of MBS and other securities the market for these may not be liquid enough for the Fed to sell them to mop up liquidity. Made sense to me. I wouldn't be buying long dated debt if I were China either.