Treasury Bonds and Rising Rates

Mike Larson takes a closer look at the relationship between Treasury bonds and the federal fund rates. Mr. Larson discusses how investors have some control over federal fund rates as the market shifts.

Yields on the benchmark 10-year Treasury note have already risen from a low of 3.31% in mid-March to around 4.12%. Larson believes that 10-year yields could shoot all the way up to the 4.5%-4.75% range.

Long-term mortgage rates aren't directly controlled by the Fed. Bond market traders and investors determine where they go. When investors are confident about the outlook for credit quality and inflation, they buy mortgage and Treasury bonds. That drives rates down. When investors are worried about rising credit losses and rising inflation, they sell. That drives rates up or at least prevents them from falling much. The Fed has slashed the federal funds rate by 3.25 percentage points since the summer of 2007. But the average rate on a 30-year fixed mortgage is hovering right around 6.08%, according to Freddie Mac. That's down only slightly from the 6.3% area at the beginning of September, when the rate cutting campaign began.

The Fed usually follows the bond market. The Fed rate cuts haven't done much for people who are hunting for 30-year fixed mortgages, but they have brought down the cost of certain loans, such as home equity lines of credit. These loans feature rates that adjust to the prime rate, and the prime rate follows the federal funds rate in lock step. The Fed cuts have also driven down the London Interbank Offered Rate, or LIBOR. That has reduced the magnitude of the rate and payment increases that certain subprime and prime Adjustable Rate Mortgage (ARM) holders have had to cope with. But the Fed pays attention to market signals. If bond prices start falling fast, Fed policymakers will interpret that as a sign that fixed-income investors are losing confidence in the Fed's inflation-fighting resolve.

"The Fed clearly won't be cutting short-term rates again when it meets on June 24 and 25. But the more important question investors should be pondering is 'When will the Fed start hiking rates' I think it could be sooner than the market expects," Larson states.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxTreasuries-Cracking-Rates-Rising-1835

About Mike Larson and Money and Markets

Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.

Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.

Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.

Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.

↑ Grab this Headline Animator

This article has been robotically scanned and tagged by Prnewsnow with the following search tags. No human manipulation of these tags take place.
| Cisco | Cisco Resale | cisco lifecycle services |

4885 readers online...

, Local News

Subscribe in a reader