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July 21, 1995
Since the beginning of May, in the most volatile ten weeks in 15 years, 30-year mortgage rates have made three complete trips from 8.125% to 7.625% and back to 8.125%.
Unfortunately, in afternoon trading today, mortgage rates bounced right on up through 8.125% to 8.25%. When a two month "trading range" blows up, you are not likely to see the old lows again without some help. The immediate causes of this blowup were a no-show recession, and testimony by Mr. Greenspan.
"Help" could arrive as soon as Friday, August 4 with the next payroll report; a three-year high in jobless claims suggests that report will be weak.
In standard euphemizing form, the financial press reported the bond market's week as a "stumble." This was no little oops-a-daisy, this was a high board four-and-a-half with a twist, head first into an empty pool. Outfits like the Wall Street Journal worry about straight reporting of scary stories, as it might make the herd nervous on the way to the rendering plant.
Though last week was the really rough part, the trouble started right after the Fed eased on July 6.
Before Fed Ease Yesterday's Highs Fed Funds 6.00% 5.75%
1 year T-bills 5.56 5.63
2 year T-notes 5.65 5.93
5 year T-notes 5.89 6.19
10 year T-notes 6.09 6.43
30 year T-bonds 6.52 6.95
Don't do us any more favors. Next time, don't ease -- at least not until a recession seems likely.
Long term investors like recessions because they eliminate inflation. Eliminated inflation makes pre-elimination bond yields look terrific, which makes people want to buy those bonds, which makes those bond prices rise, which makes scads of money for the prior owners.
Mr. Greenspan's testimonial coup de grace: "Š we may have passed the point of maximum risk" of recession.
Mr. Chairman, if the risk has passed, why ease in the first place?
Well, for one, the White House asked us to. Sure we're independent, and aren't required to respond when Leon Panetta leans on us, but not even the Fed ignores the White House. Alan Blinder wants my job, and I'm not quite done with it. Also, you may recall 1987, my first year as chairman, when we were tightening along, and the stock market had a couple of bad days in October. A little easing here would be good cover if the Dow coughs up a thousand points while I'm being re-appointed.
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