(COMTEX B: Mortgage market commentary--Low rates
require persistent panicNov 22, 2002 (Inman News Features via
COMTEX) -- The tone of financial marketsshifted suddenly this week, favoring
stocks and hurting bonds and mortgages. Byyesterday, 30-year fixed rates
touched 6.25 percent in the lowest-fee offerings,the high for rates in the
last three months.There was nothing in new economic data to cause
such an abrupt change inpsychology. A modest drop in new unemployment claims
and some life-like twitchesin technology were not enough, though there is a
growing sense that the Novembereconomy has been no worse than flat, and not
an extension of theSeptember-October decline. For rates to stay low, panic
must persist; instead,yields on ultra-safe Treasuries and mortgages rose,
while rates for corporatebonds stayed the same or fell. Narrowing "credit
spreads" invariably reflectsfading fear.Federal Reserve Board
Chairman Allen Greenspan dropped a policy hint in anaccidental way on
Tuesday, and the big change in market psychology followed.This Fed
Chairman doesn't drop lint by accident. Fed Chairmen avoid making
majorpolicy pronouncements in high-tension settings; instead they leak them,
or slipthem in some otherwise ho-hum remarks. Tuesday's numbing venue: six
droningpages on international financial risk delivered to the Council on
ForeignRelations. The text is on the Fed's Web site; read it and you can all
but hearthe audience struggle for wakefulness, punctuated by the plopping of
faces intosoup plates.In asides from the published text of the
speech, the Chairman gave starkdescriptions of the economy: "...a very major
fallback in businessinvestment Nobody is doing anything, or I should
say, most everybody isdoing nothing."Then, also aside from
text, came an astonishing statement of possible Fedaction. The Chairman: "We
would just move out on the curve, as we have in thepast. We are very far
from the Fed being restricted."Moving "out on the curve" is a
phrase beyond the mainstream media, hence aremark unreported and unnoticed
except among professionals. It refers to the"yield curve," the graphic
description of interest rates prevailing at
differentmaturities.The Fed-controlled rate watched by
everyone in the modern era is the Fed fundsrate, the overnight cost of
money. Until Tuesday, the markets had assumed thatthe Fed's half-point rate
cut two weeks ago to 1.25 percent marked the near-endof the Fed's assistance
to the economy; that the Fed had shot its bolt, we wereon our own and the
Fed is nearly as helpless as the Bank of Japan.To "move out on the
curve" means that if the Fed runs out of above-zero Fedfunds room, it would
begin to buy longer-dated instruments -- bonds -- and drivedown the whole
rate structure as necessary to revive the economy.Greenspan's "as
we have in the past" referred to a policy in mothballs for halfa century.
>From 1942 to 1951, the Fed held the yield on long Treasury bonds to2.5
percent or less, buying bonds whenever yields threatened to rise higher.
Inthe modern era, it has been axiomatic that the Fed does not manipulate
long-terminterest rates. No modern Chairman has suggested that the Fed even
try to do so.At best, the Fed has worked to keep long-term rates low by
keeping inflationlow.This policy announcement is a big deal.
In the near term, it leads to a perverseeffect in the bond market-the Fed as
a potential buyer of bonds should helprates, but hurts instead. The logic:
if the Fed has the power to rescue theeconomy and intends to do so, then
traders and investors shouldn't buy mortgagesand bonds, and maybe should
sell the ones they have and buy some stock.Will the Fed need to
move "out on the curve"? Watch U.S. automakers, stockmarkets, holiday sales
and the visibly sinking economies in Japan and now,Europe.Lou
Barnes is a mortgage broker and nationally syndicated columnist based
inBoulder, Colorado. He can be reached at [EMAIL PROTECTED].Send
a Letter to the Editor for publication. Send a comment or news tip to
ournewsroom. Please include the headline of the
story.By Lou BarnesInman News
FeaturesCopyright 2002 Lou Barnes Distributed by Inman News
Features-0-INDUSTRY KEYWORD:
Consumer*** end of story ***
