Tuesday, February 26, 2008

Long Term Bond Yields Moving Opposite Direction to FED Funds Rate

Why is Ben S. Bernanke, U.S. Federal Reserve chairman, failing to bring down the cost of credit for American homeowners? The average fixed rate for a 30-year home loan rose during February 2008 (Freddie Mac, the world's second-largest mortgage buyer after Fannie Mae). The increase occurred after the Fed lowered its short term rate benchmark rate by 0.75 percent on Jan. 22 and cut the rate by another half-point eight days later. When Bernanke faces Congress on Feb. 27 and 28, he will be questioned about why long-term bond yields are moving in the opposite direction to the Fed funds rate. Lower fixed mortgage rates would avert foreclosures and give consumers more money to spend. Bernanke is caught in a tug-of-war between growth and inflation, which is a threat and influencing mortgage-bond investors who set the fixed rates. More than two-thirds of Americans own their own home, with total mortgage debt of $11 trillion (according to the FED). About a third of the loans are adjustable-rate mortgages (Federal Housing Finance Board). Nine out of 10 people with ARMs who refinanced in the fourth quarter 2007 moved to a fixed-rate loan (Freddie Mac).
Posted by Harrison K. Long, Explore Properties Group, Feb. 26, 2008
[source: www.Bloomberg.com]


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