Washington D.C. February 17.2006
Federal Reserve Chairman Ben Bernanke made a clear bet last week that pushing short-term interest rates above long-term rates won't send the economy into a recession — or stop the central bank from raising rates.
On Friday, the bond market called that bet. Long-term Treasuries rallied, with the 10-year yield falling to 4.54% and the 30-year yield down to 4.51%. Meanwhile, the three-month yield ended at 4.55% and the two-year at 4.68%.
Testifying Wednesday before the House Committee on Financial Services, the Fed Chairman called the economy "on track" and stated unequivocally that an inverted yield curve isn't worrying the Fed.
"Historically, there has been some association between inversion of the yield curve and subsequent slowing of the economy. However, at this point in time, the inverted yield curve is not signaling a slowdown," he said.
Cash-rich foreign investors as well as U.S. pensions and insurance companies are willing to accept low long-term yields in exchange for the safety of U.S. assets, he said.
The Mortgage Market Rallied on the news.
If 40-year loans and other new products prove as popular as some lenders expect, the housing market could benefit from yet another tailwind.
For the last four years, newly tweaked and marketed nontraditional mortgages extended the housing boom even as high home prices sank affordability ratios to record lows in some areas.
I think it does well for investors who don't want interest-rate risk.
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