[A-List] Re: [TNF] 30-year Treasuries

["Gary Santos" <evs@xxxxxxxxxxxx>]

"The agencies have also been hedging their interst rate exposures with
derivatives. There is on-going investigation that will eventually reveal
very unwelcome disclosures, the tip of the iceberg having been hinted in
recent weeks."
--------------------------------
Henry,

What sort of investigation? How rolled over derivatives are booked?

Gary


----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>; <a-list@xxxxxxxxxxxxxxxxxxx>;
<TheNewForum@xxxxxxxxxxxxxxx>
Sent: Sunday, July 20, 2003 5:54 AM
Subject: [TNF] 30-year Treasuries


> The following is a composite summary of recent market reports from a
> variety of media sources interlaced with my comments to give my sense of
> an overview picture.
>
> The 30-year bond (US30YT=RR) gained 8/32 to yield 4.68 percent on
> Friday, July 11 shrugging off some of the pressure exerted since
> Wednesday, July 9 2003, when Treasury Undersecretary Peter Fisher
> announced his intention to resign.
>
> Fisher played a key role in the elimination of the 30-year bond back in
> October 2001 and speculation had mounted over the chances of its
> reintroduction once he leaves.
>
> The Washington Post reported in mid May that Treasury Undersecretary for
> Domestic Finance Peter Fisher had withdrawn his name for consideration
> as president of the New York Fed.
>
> The market believed that as long as Pete 'The fixer' Fisher
> (LTCM) remained in his current position at the Treasury, the 30-year will
> not be reinstated. It was Fisher's decision to eliminate the 30-year
> bond on Halloween day 2001 and his reputation and credibility are tied
> to it.  Recently, while still at the Treasury, he said rumors of the
> return of the 30-year 'aren't worth spit'.
>
> With barely any warning to the financial markets, Fisher announced in
> October 2001 that Treasury would no longer issue 30-year bonds--the
> so-called benchmark securities that had set prices for the whole
> bond market. The rationale was that the government was paying too much
> in interest for the long bond. Besides, big budget surpluses had reduced
> the need for the 30-year.  It is cheaper for government to issue new
> money (non-interest bearing state credit instrument) through the Fed
> than to issue sovereign debts through the Treasury.  Of course Fisher
> did not point out that an sustainable long term monetary policy requires
> a constant but low rate of inflation - which is essential the money
> holder's interest cost to the state money issuer.  Thus money in a
> working growth economy is not really interest free.
>
> Greenspan said in the Q&A during his July 15 Humphrey Hawkins testimony
> to the Senate that while the Fed has no opinion of the 30-year bond
> policy, it is obvious that things have change:  meaning federal deficits
> have replaced federal surpluses in the foreseeable future.
>
> Things have indeed changed dramatically, with the federal deficit in
> 2003 hitting $450 billion or 4.5% of GDP, not even counting
> war/occupation costs. And the government's bond rates have
> fallen, causing a boom in bond prices until recently.
>
> Many market participants think the Treasury should reverse its
> decision--and start issuing new 30-year bonds. Doing so would help
> government finances, give investors a long-term, risk-free investment
> option, and allow corporations to more easily price long-term debt.
> There was a time this would be true. The long bond used to be the safest
> hedge instrument before the emergence of structured finance. The entire
> fixed income sector was based on the long bond.  Today, derivatives and
> swaps have changed the meaning of hedging, turning it from a risk
> management device to a risk taking play for high returns for
> speculators. Structure finance, not withstanding the claim of Greenspan
> that derivative provide market stability.  Structured finance
> dis-integrates long term security into short term differentials, with
> profit driven by volatility. A stable market is bad news for hedge
> funds.  Structured finance has reduced the relevance of the long bond.
>
> The term fixed income has come to mean fixed only for the duration of
> the derivative contract term, even for the long bond.  Widows and
> orphans trust funds, pension funds as well as Freddie Mac mortgages have
> all been exposed to inappropriate risk by derivative plays, at the mercy
> of hedge funds.
>
> It wouldn't be the first time the government changed its policy on the
> long bond. From the 1950s through the middle of the 1970s, 30-year bonds
> were issued only sporadically. It was not until 1977 that Treasury
> started using large quantities of 30-year bonds to fund growing and
> permanent deficits.
>
> The theory for bring the long bond back is that Treasury would gain by
> tapping into institutional and foreign investors attracted to the
> 30-year. More buyers means lower rates for the government. And a 30-year
> issue would lock in low rates for the next 30 years, holding down
> interest payments and reducing future deficits. But with agencies play
> derivates, it is not clear that government actually saves money by
> issuing the long bond. Even though new 10-year notes cost the Treasury
> 0.8 percentage points less in interest than 30-year rates today, in a
> decade, they might have to be refinanced at higher rates. "The U.S.
> Treasury should be at least as smart as homeowners," notes David A.
> Wyss, chief economist at Standard & Poor's, a unit of The McGraw-Hill
> Companies.  But it is, even with the 30-year bond because the market
> value, therefore the effective yield of the long bond is not at all
> fixed over its life time.  The the net value of government long debt is
> not constant at any moment in time, nor its effect on the credit market.
>   The only thing fixed is the interest payout by the government on the
> outstanding long bonds. Since new long bonds are issued at market rates,
> the average cost of long bonds to the government is not constant.
> Besides, what Fisher missed is that the purpose of the long bond is not
> to fund government cash needs, but to provide a benchmark for the credit
> market.  The interest cost to the government has little macroeconomic
> consequence, except to those who misunderstood macroeconomics as a
> branch of accounting.
>
> The conventional wisdom is that reissuing the 30-year bond would also
> offer risk-shy investors more choices, helping both institutional
> investors with a long-term investment horizon and individuals building a
> retirement portfolio. Correctly done, investing in a 30-year Treasury
> bond means that "people who are 35 or 40 years old who are saving for
> their retirement would know exactly what they're going to have in 30
> years," says Wharton School economist Jeremy Siegel. While other
> long-term securities exist, none are truly risk-free.
>
> It is argued that bringing back the long bond would also help pension
> funds, insurers, and corporate borrowers. Pension funds, hit hard by
> market volatility, could better protect returns by upping their
> long-term risk-free holdings. Insurers could better match long-term
> investment to long-term liabilities. But few retirment accounts are
> satisfied with long bond yields.  No pension fund manager can keep
> his/her job for long if the assets under management is excessively heavy
> in long bonds. And issuers had been chasing high returns by borrowing
> short term to invest in long bonds, and will be caught short when a
> reverse yield curve takes over, as it did during the final years of the
> Clinton "boom".
>
> And it is also argued that a reissued 30-year would help companies price
> their own long-term debt, attracting more investment. But short term
> debts are now routinely used to finance long term liabilities, making
> the long corporate bond a wall flower, a mere underlying benchmark to
> calculate spread.  GE cannot afford to borrow long term debt. It is the
> low rate GE commercial papers that give GE the spread to be a financial
> powerhouse.  GE is extremely vulnerable to deflation and to reverse
> yield curves.
>
> It would be tough for Treasury to reverse the decision to drop the  long
> bond. To guarantee buyers sufficient liquidity, Treasury would have to
> commit itself to issuing 30-year bonds for several years, which makes
> sense only if deficits are going to persist--and that's something the
> Bush Administration isn't willing to admit yet, despite irrefutable
> evidence.
>
> Shock waves from Greenspan virtually disavowing unconventional policy
> means (buying long bonds) have fully eclipsed the gains set in motion by
> his original references to deflation. Longer-dated bonds proved
> particularly vulnerable, especially after the release of
> stronger-than-expected June retail sales. Their premium evaporated just
> as a record $450 billion 2003 deficit was predicted by the White House
> following elevated hopes for a reinstatement of bond issuance recently
> with Fisher's resignation.
>
> The curve steepened sharply, not only pricing in economic recovery but
> also the likelihood that Fed funds will be held low, so long as Fed
> reflation efforts continue. While Greenspan digged hard for additional
> grounds for optimism on the economy, he made it clear that while on the
> verge of price stability rates would be kept low. The September bond
> closed over 2 points lower at 112-16, while the 2-year note and 30-year
> bond spread jumped 10 basis points from pre-testimony levels to +350
> basis points -- fresh 11-year wides. Fed funds futures predicted 25-30%
> odds of another quarter point cut.
>
> The bond market has been on a roller-coaster ride recently as investors
> struggled to divine the intentions of the Fed. Gambling that
> the Fed would buy bonds to help ward off deflation, investors piled into
> the market in mid-June, sending the yield on the 10-year Treasury note
> to a 45-year low of 3.1%. But when the Fed opted to merely trim interest
> rates on June 25, investors turned tail and sold bonds.
>
> The coup de grâce came on July 15 as Chairman Alan Greenspan forecast
> faster economic growth and seemingly all but ruled out bond purchases by
> the Fed. The bond market quickly tanked. Greenspan tried to turn the
> tide the next day by saying he hadn't taken bond buys off the table, but
> the damage had been done, and the 10-year yield ended the day at close
> to 4%.
>
> The wild market fluctuations have left a sour taste in the mouth of many
> market participants. Some mutter about being manipulated and misled by
> the Fed. "Greenspan has lost some credibility with the market," says
> Melvyn B. Krauss, senior fellow at Stanford University's Hoover
Institution.
>
> Of course, some of the rise in bond yields is due to growing hopes for
> an economic rebound -- a phenomenon to be welcomed but highly unlikely
> given the poor fundamentals, geo-political uncertainties, and policy
> fixations.  Yet the rapid increase in long-term interest rates
> also reflects wariness about the Fed floundering with wishful thinking.
> If investors feel they can't count on a predictable and level-headed
> Fed, they're apt to push bond yields and long-term rates up higher than
> justified by the perceived or wishful strengthening economy alone.
>
> A premium for Fed risk could even lift rates to the point where they
> hurt the very economic recovery the bulls are anticipating. "This is not
> an economy that's going to take off like a rocket," says former Fed
> Governor Lyle Gramley, now senior economic adviser for Schwab Capital
> Markets. "I would be more comfortable if 10-year yields were at 3 1/2%,
> instead of 4%."  It is an economy that will most likely explode during a
> unprepared takeoff from leaky ideological O rings.  It will move from
> unpleasant recession to fatal catastrophe.
>
> The federal budget deficit is ballooning. The White House on July 15
> predicted a financing shortfall of $455 billion in fiscal 2003, and $475
> billion for fiscal 2004, which may well come in at $600 billion. The
> forecast fanned fears in the bond market of stepped-up sales of Treasury
> securities, helping to send prices even lower and yields higher.
>
> Dealers, banks, and hedge funds are sitting on large bond positions they
> built up via so-called carry trades -- borrowing money at low short-term
> rates and then investing it in longer-dated securities. This is what is
> behind bank profit in the latest quarter, which most have hailed as good
> news rather than the bad news that it actually represents. But with the
> value of those bond investments falling, there's a risk of a major
> sell-off as those trades are unwound, says economist Henry Kaufman.
> Kaufman has seldemn if ever been wrong on the economy in his long career
> on Wall Street.
>
> Fed policymakers egged on investors in June with warnings about the
> dangers of falling prices, capped off by Greenspan's colorful comments
> on the need to build a "firebreak", Greenspan’s word in a June 3 speech,
> against deflation. In private meetings and public speeches, Fed
> officials suggested they were deliberately trying to guide long-term
> rates lower and left open the possibility of buying bonds to help their
> chances.
>
> There's no doubt that investors read more into some comments than the
> Fed intended. They ignored repeated warnings by Greenspan and other Fed
> policymakers that the risk of deflation was, after all, remote. Instead,
> they snapped up bonds in the mistaken belief that a desperate Fed would
> bail them out by buying up their securities. "The market has got to take
> some responsibility for its own actions," says former Fed Governor
> Laurence H. Meyer.  This is rational expectation at work to the point of
> irationality.  The detonator is the Fed's claim that the risk of
> deflation is remote.  Not even taxi drivers believe it.  Even the BIS is
> calling for anti-deflationary measures for all of the world's central
> banks.  Greenspan's war plan is always to anticipate phantom inflation
> and deny real deflation.  When Greenspan again recite his mantra that
> America enjoys the highest stabdadr of living, presumably due to his
> monetary genius, he was interrupted by the senator from Vermont, the
> Greenspan should visit Vermont to find out how hard life really is in
> America.  The high standards of living is limited to the few who
> Greenspan's policies had been designed to favor, namely financiers and
> top executives.
>
> The markets' eroding confidence in the Fed has consequences. The danger
> grows if investors feel so threatened by what they see as an unsteady
> Fed policy that they demand ever higher risk premiums on Treasury bonds.
> Greenspan has been repeating his promise to buy long term treasuries if
> the economy needs it. His out is that the economy never needs it.
> Greenspan is milking the economy dry to maiantain the financial markets.
>   And, American voters, hurt by the economy, will turn against the
> financial markets and its managers.
>
> The unconventional means suggested by Bernanke is that the Fed can buy
> 10 or 30 year treasuries from open market operations and create new
> reserves in the banking system. This drains treasuries from the market
> and makes each treasury worth more as a result. This allows the sellers
> to offer lower yields to the new buyers and still be able to sell them.
> Simple supply and demand at work.
>
> As the yield on the 10 or 30 year treasury falls all other rates that
> are tied to it fall, corporate debt, fixed and floating home mortgages
> of all durations. When Greenspan says he is ready and willing to buy
> long treasuries to stimulate the economy what he means is that he will
> manipulate mortgage rates down to attract new buyers into housing and
> cause another refinance boom, which has come to a screeching halt in
> recent months.
>
> The 30 year fixed rate mortgage accounts for about 65% of all mortgage
> loans in the US. The rate on that loan is determined largely by the cost
> of borrowing money at Fannie Mae and Freddie Mac. Their borrowing cost
> is determined by the yield on the 10 year treasury because most 30 year
> mortgages are refinanced with 10 years. That rate will be the 10 year
> treasury yield plus a risk premium for lending money to Fannie and
> Freddie versus lending money to the US government. As the yields on
> the 10 year US treasury fall lenders to Fannie and Freddie are willing
> to accept a corresponding reduction in rate they will accept from Fannie
> and Freddie for lending money to them as well. Fannie and Freddie then
> pass this reduction on to the banking and mortgage industry in the form
> of lower PAR rates or cost of money for mortgages. The banking and
> mortgage industry then pass this reduction on to each home owner by way
> of lower mortgage rates.
>
> This process has been going in a passive manner for the past year, as
> the Fed has indirectly been the cause of lower mortgage rate over the
> course of this year. This is Greenspan housing bubble after his eqity
> bubble burst.
>
> For the past year the Fed has been increasing money supply by buying
> treasuries form the banks and replacing them with bank reserve, high
> power money. The banks in turn have been turning around and re-buying
> treasuries on the open market. The result has been lower long term rates
> and a refinance boom in the US housing market.
>
> The agencies have also been hedging their interst rate exposures with
> derivatives. There is on-going investigation that will eventually reveal
> very unwelcome disclosures, the tip of the iceberg having been hinted in
> recent weeks.
>
> The Fed's primary supply side game plan was to encourage banks to lend
> to corporations which has not occurred becuase of overcapacity that
> erodes pricing power and proifts. The reduction in mortgage rates
> during this period was a peripheral bonus that sustained consumers
> spending by the Fed repricing long term debt to support the economy
> while the Fed attempted to get corporations to borrow. The housing
> refinance boom provided cash-outs from appreciated equity resulting from
> the housing bubble as well as lower loan payments to finance consumer
> spending. When the housing bubble bursts, negative equity will create
> chaos in the financial markets through the collapse of collateralized
> martgage obligations (CMO).
>
> Greenspan appears to have shifted Fed policy to preempt deflation and
> aggressively move rates down ahead of the economic contraction and is
> now preemptively telling the market he may move out on the yield
> curve to long bonds and buy long treasuries with the explicit goal of
> driving mortgage rates down.
>
> The reason he is being so vocal about his possible intentions to buy
> long term treasuries is to ensure hedge funds and most importantly the
> soeverign debt markets are hedged against falling rates before it
> occurs. It is a warning or "heads up" so to speak to them.
>
> Last summer the duration gap problem at Fannie Mae was the direct result
> of Fannie Mae not anticipating that the 10 year treasury yield would go
> below 4%. When it did their duration gap widened and they lost enormous
> amounts of money. The reason they were not properly hedged is that they
> anticipated that the reduction in Fed Funds and corresponding increase
> in money supply would depreciate the dollar and increase the potential
> for future inflation in the US economy which would have been reflected
> in rising 10 year treasury yields rather than falling.
>
> But, because the corporations refused to borrow and banks refused to
> lend, in a classic Keynesain liquidity trap, and the rest of the world
> continued to buy US treasuries with their trade surpluses from US
> consumers, the dollar did not depreciate against the Yen and Euro until
> recently and by not much. Even now the euro is only back at the exchange
> value it adopted at the time of its intrduction. This was the first
> major international empirical signal that this was not the same type of
> economic contraction that we have experienced since the end of WW2.
>
> Every other post war recession has been the result of the Fed
> maintaining too tight a monetary policy as they preemptively tried to
> predict and stop inflation. In other words the Fed caused every other
> post WW2 recession up to and with the exception of this one.
>
> Every time the Fed lowers rates, equity traders buy stock. This
> exaggerates volatility in the stock market. Young traders, and trading
> is a field dominated by youth, today have never experienced a market in
> a true long wave economic down cycle rather than a Fed induced
> contraction.  Economic down cycles have never been stopped by
> monetary policy before. Greenspan's reputation had been built on
> postponing the business cycle by flooding the system with money to feed
> a debt bubble.  There are two problems with that approach: 1) a day of
> rekoning can only be postponed but not avoided, and 2) debt is
> unsustainable without inflation and fatal with deflation.
>
> Driving down mortgage rates worked through 2002, but it has come to an
> end. It brought Greenspan time but nothing else.  The interest rate
> induced recovery will run out of steam by the thrid quater of 2003, not
> withstanding the Fed optimistic pronouncement that the economy will
> recover by then.  What the Fed is really saying id that the economy had
> better recover by then or we will all be in the soup.
>
> NEW YORK, Jul 15, 2003 (AP Online via COMTEX) -- Investors dumped
> Treasury bonds Tuesday, sending yields higher, after Federal Reserve
> Chairman Alan Greenspan indicated that the Fed would not buy back bonds
> as a way to keep long-term interest rates low.
>
> Greenspan's remarks, which came in one of his twice-yearly economic
> reports to Congress, further disappointed bond investors following the
> Fed's smaller-than-expected interest rate cut in late June.
>
> Greenspan said he would likely use the Fed's main tool, cutting
> short-term interest rates, to stimulate the economy. That disappointed
> investors who hoped the Fed might buy back long-maturity bonds, which
> would increase their value.
>
> The price of the benchmark 10-year Treasury note fell 1 27/32 point, or
> $18.44 per $1,000 in face value. Its yield, which moves in the opposite
> direction, rose to 3.96 percent compared with 3.73 percent late Monday.
>
> The 30-year Treasury bond fell 2 7/8 point to yield 4.95 percent, up
> from 4.77 percent a day earlier, according to Moneyline Telerate.
>
> The benchmark 2-year note fell 3/16 point to yield 1.45 percent, up from
> 1.35 percent Monday. Intermediate maturities fell between 7/16 point and
> 1 19/32 point.
>
> Yields on one-month Treasury bills were 0.89 percent as the discount
> rose 0.01 percentage point to 0.87 percent. Yields on three-month
> Treasury bills were 0.91 percent as the discount rose 0.03 percentage
> point to 0.89 percent. Six-month yields were 0.97 percent, as the
> discount rose 0.02 percentage point to 0.95 percent.
>
> Yields are the interest bonds pay by maturity, while the discount is the
> interest at which they are sold.
>
> The federal funds rate, the interest on overnight loans between banks,
> rose to 1.19 percent from 1.06 percent late Monday.
>
> In the tax-exempt market, the Bond Buyer index of 40 actively traded
> municipal bonds fell 13/16 111 17/32. The average yield to maturity rose
> to 4.97 percent from 4.90 percent.
>
> A single speech by Alan Greenspan may have squashed what remained of a
> tidal wave of mortgage refinancings that began three years ago.
>
> The Federal Reserve chief spooked the bond market Tuesday when, during
> his semiannual address to Congress, he said the central bank did not
> plan to buy bonds on the open market. The comments caused mortgage
> rates, which are tied to bond yields, to shoot up to their highest
> levels in three months.
>
> Within minutes after Greenspan completed his address Tuesday, lenders
> said they were besieged with telephone calls from anxious homeowners
> rushing to refinance before rates edged even higher.
>
> "My fear is that we may be seeing the last, dying gasp of the 'refi'
> boom," said Mark Ralston, senior loan officer at AccessOne Mortgage, a
> mortgage banking and brokerage firm based in Raleigh. "Most people have
> already refinanced. And those who were on the fence are doing it now."
>
> And that could be bad news for the economy. Mortgage refinancings, in
> which borrowers trade one mortgage for another at a lower interest rate,
> have funneled billions of dollars into consumers' pockets over the past
> three years. Borrowers have used the extra cash to renovate their homes,
> buy cars and pay for their children's college education.
>
> In mid-June, when the 30-year mortgage rate dipped to a 45-year low of
> 5.28 percent, lenders and mortgage brokers were overwhelmed with
> mortgage refinancing requests. Some lenders turned away potential
> business because they lacked the manpower to process the applications.
>
> "I've been in this business 20 years, and I have never seen anything
> like the amount of refinancings we saw in May and June," said David
> Novak, a loan officer at Home Mortgage Company of North Carolina in
> Cary. "It was almost out of control."
>
> Now mortgage lenders say this refinancing wave may have crested, in the
> same way that stocks peaked in March 2000. And most blame Greenspan.
>
> About halfway through his address Tuesday, Greenspan said he saw no
> imminent need for the Federal Reserve to buy bonds on the open market.
> Earlier this year, the Fed had floated the idea of buying bonds, which
> would have driven interest rates even lower.
>
> When Greenspan pronounced that possibility "most unlikely," investors
> and Wall Street traders began dumping large numbers of bonds. That
> sell-off drove down bond prices and pushed up their yields, which move
> inversely to each other.
>
> Most lenders base mortgage loans on the 10-year bond's yield, which
> jumped 0.26 percentage points Tuesday to 3.983 percent -- the highest
> level since April.
>
> Greenspan tempered his comments Wednesday, when he finished his
> semiannual report to Congress, by saying that he has not ruled out
> buying bonds to stimulate the economy. Yet that did not reassure bond
> investors, as the yield on the 10-year bond remained high Wednesday at
> 3.92 percent.
>
> Normally, mortgage lenders issue one set of mortgage rates in the
> morning and leave them unchanged for the day. But within an hour after
> Greenspan's speech, banks began increasing their mortgage rates in
> response to the bond sell-off.
>
> By Wednesday afternoon, the average rate on a 30-year mortgage had
> jumped 22 basis points to 5.83 percent (a basis point is one-hundredth
> of a percentage point), according to Bankrate.com of North Palm Beach,
Fla.
>
> The sharp increase caught some mortgage brokers off guard. Ralston of
> AccessOne said he had to call back some borrowers Tuesday afternoon and
> tell them that the rate he quoted them in the morning was no longer
> accurate. In some cases, people who were considering plans to refinance
> decided against it because of the rate increase.
>
> "There is a profound sense of lost opportunity among people who did not
> refinance three or four weeks ago," said Greg McBride, senior analyst at
> Bankrate.com.
>
> And the Fed's bullish comments on the economy suggest that mortgage
> rates will continue edging up, McBride said. Also Tuesday, the Fed
> released its semiannual report to Congress. In the report, the Fed
> predicted that the U.S. economy will grow 3.75 percent to 4.75 percent
> in 2004.
>
> When the economy is growing, investors tend to prefer stocks over bonds.
> As demand for bonds falls, their yields rise -- pushing up mortgage rates.
>
> On 16 July 2003, the chairman of the US Federal Reserve delivered an
> optimistic growth forecast and bond traders reacted with heavy selling
> activity which sent yields at the long end of the curve soaring. Such a
> reaction is not likely to be what Greenspan wanted, as low long-term
> bond rates help to determine mortgage and corporate lending rates, and
> can stimulate borrowing and spending. Traders, however, are wary of
> being trapped with portfolios heavy with relatively expensive long-dated
> Treasury bonds when interest rates eventually rise.
>
> On 16 July 2003, Alan Greenspan, the chairman of the US Federal Reserve,
> issued a surprisingly upbeat assessment of the US economy, and said that
> the Reserve no longer felt it necessary to employ strategies such as
> buying back bonds to protect against deflation. Bond market traders
> responded with a global sell-off of long-dated bonds,
>
> Even though Federal Reserve Board Chairman Alan Greenspan told Congress
> on Tuesday that he wants to keep interest rates low to help the economy,
> bond investors had other ideas.
>
> The prices of long-term bonds plummeted -- and their yields soared --
> shortly after Greenspan implied the Fed probably won't need to buy back
> long-term bonds to contain deflation.
>
> Higher yields on long-term bonds push up mortgage rates, and on Tuesday,
> mortgage rates spiked up sharply. In the Bay Area, some 30-year fixed
> rate mortgages are now close to 6 percent, nearly a full percentage
> point from their lows in mid-June.
>
> If rates continue to climb, they will crimp borrowing and spending and
> weaken the fragile recovery -- the exact opposite of what Greenspan wants.
>
> However, investors were struck not just by Greenspan's words but by his
> tone. His words still reflected the Fed's readiness to cut rates if the
> economy looks weak -- but his tone showed more confidence that won't be
> necessary.
>
> Only a few weeks ago, the Fed's main worry was on deflation, a
> destructive cycle of falling prices and wages that erode the economy's
> productive capacity. Not so much now, it appears.
>
> "What was very, very important in May became lip service in June and is
> somewhat secondary now," said Gary Schlossberg, senior economist at
> Wells Capital Management in San Francisco.
>
> In addition, Greenspan gave a fairly optimistic forecast for growth,
> especially next year. Although he predicts the economy will expand at a
> slow 2.5 percent to 2.75 percent this year, he thinks it will rebound at
> 3.75 percent to 4.75 percent in 2004. If so, unemployment could drop to
> 5.5 percent by the end of the year, he said.
>
> Again, what's good news for the economy would depress bond prices from
> the unusually high peaks now.
>
> The price of the benchmark 10-year Treasury note sank $18.44 per $1,000
> in face value. Its yield, which moves in the opposite direction, rose to
> 3.96 percent compared with 3.73 percent late Monday. The yield on the
> 30-year Treasury bond shot up to 4.95 percent on Tuesday from 4.77 the
> day before.
>
> That's a significant increase in yields from mid-June when the rate for
> the 30-year Treasury bond was only 4.17 percent. But will rates continue
> to rise or are they just bouncing up before they resume their downward
> trend?
>
> Gibbons Burke, the editor of markethistory.com, thinks a major change in
> the bond market depends on whether the 30-year Treasury bond yield rises
> above 5 percent -- roughly its level late last year and early this year.
> If it does, then that will signal the end of declining rates, he said.
> If it doesn't, rates could continue to stay low or sink.
>
> "We're at the moment of truth," Burke said.
>
> Bonds fell after Greenspan indicated the Fed would be unlikely to pursue
> unconventional tactics against deflation such as buying up long-term
> Treasuries, the Wall Street Journal reported.
>
> Greenspan said the Fed will hold short-term interest rates low "as long
> as it takes" and may even cut interest rates further if necessary.
>
>
>
>
>
>
>
> ------------------------ Yahoo! Groups Sponsor ---------------------~-->
> Buy Ink Cartridges or Refill Kits for Your HP, Epson, Canon or Lexmark
> Printer at Myinks.com. Free s/h on orders $50 or more to the US & Canada.
> http://www.c1tracking.com/l.asp?cid=5511
> http://us.click.yahoo.com/sOykFB/k9VGAA/ySSFAA/qkHolB/TM
> ---------------------------------------------------------------------~->
>
> TNF has two guidelines designed to maintain a positive tone.
>
> (1) If you take offense at another member's message, write to that person
privately; if you think the moderators should be informed, CC your private
message to thenewforum-owner@xxxxxxxxxxxxxxxx
>
> (2) Avoid on-list meta-discussions or co-moderation; address such matters
to the individuals involved and/or to the moderators.
>
>
>
> Address to unsubscribe: TheNewForum-unsubscribe@xxxxxxxxxxxxxxx
>
>
>
>
>
> Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
>
>
>
>