Today I was checking out mortgage rates with hopeful thinking that they would continue to fall, and at some point, some demand in the housing market would develop. I went to Bankrate.com and saw that mortgage rates, along with Treasuries on the longer end of the yield curve, ebbed upward over the last week The benchmark 30-year fixed-rate mortgage rose 31 basis points to 5.59 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.30 discount and origination points. One year ago, the mortgage index was 5.57 percent; four weeks ago, it was 5.84 percent. Overall, mortgage rates are essentially unchanged from a year ago. But then, in the same article, I read that bond investors are worried about inflation with the oncoming $825 billion stimulus package (expected to be on Obama's desk by Feb. 16th): When bond investors foresee inflation, the result is higher bond yields. That carries into higher mortgage rates. Maybe it's not a coincidence that, in the last week, the biggest jump in bond yields happened on President Barack Obama's inauguration day. The new president and his advisers have said that it would be safer to err on the side of overspending, rather than not spending enough. This is completely ridiculous. Bond investors are still worried about deflation - falling prices - and most certainly not about inflation. Look at the expected inflation rate in the Treasury Inflation Protection Securities (TIPS) market (Source data is from the Fed, here):
The chart lists the market inflation expectations through January 21, 2009, which sits at 0.58%. That is the difference between the nominal 10-yr Treasury bond and the inflation-adjusted (real return) 10-yr TIPS.
The market expects annual inflation will be just 0.58% for the next 10 consecutive years! That is quite remarkable, and to me, rather unthinkable. With the amount of reserve base that Bernanke's pumping out, I find it quite impossible that inflation would be less than 1% for even the next two years.