Sunday, August 07, 2005

All Eyes on Greenspan Tuesday

This from CNN:
... continually low long-term rates could further fuel speculation in what is already a torrid real estate market.

Federal Reserve Chairman Alan Greenspan will be center stage on Tuesday as he announces what's going to happen to the federal fund rate, which is used by banks to determine overnight lending rates. While this number does not directly influence mortgage interest rates, it can influence investors, whose actions most certainly do affect mortgage rates.

If, for example, the fed puts the stink of recession in the air, such an action could prompt investors to sell off long-term bonds and mortgage-backed securities. In doing so, those investors could very well pump up mortgage interest rates and send the housing market into a downturn. Who's going to buy a house if the interest rate goes up a point, or two over night? Buyers are going to look for savings, either in the price of the house, or in the interest rate.

Ok, now consider the very real possibility that short-term bond rates could exceed long-term bond rates if Greenspan and the fed keep raising rates. That's a situation that has proved a good indicator of an oncoming recession, and just the sort of thing that could put those investors in the mood to sell their mortgage-backed securites.