30-year rate rises for first time in 2005
Alan Greenspan didn't intend to make long-term interest rates fall
last year, and he doesn't know why they did.
It's easier to explain why mortgage rates rose this week after
six straight weeks of declines. The 30-year fixed-rate mortgage
went up for the first time this year.
The benchmark 30-year fixed-rate mortgage rose 3 basis points to
5.62 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 0.31 discount
and origination points. One year ago, the 30-year fixed mortgage
rate stood at 5.58 percent.
The 15-year fixed-rate mortgage rose 2 basis points to 5.17 percent.
The one-year adjustable-rate mortgage fell 3 basis points to 4.44
Two things happened to make mortgage rates move upward. The first
was the release last week of jobless claims numbers from the previous
week. About 303,000 people filed for unemployment in the first week
of February. That was the lowest jobless-claims number since October
2000. Wall Street took the development as a harbinger of rising
wages in the future, and that means inflation, and that means higher
long-term interest rates.
The other thing that happened was the Treasury borrowed $51 billion
to finance part of the federal budget deficit. The government borrows
money by selling new Treasury notes and bonds. When the Treasury
sold $51 billion in bonds on Friday, the bond prices fell -- just
the reaction you would expect when so much supply is dumped on the
market in one day. When bond prices fall, the yields rise. That's
what happened, and mortgage rates followed.
Homeowners demonstrated good timing -- applications for mortgage
refinances have gone up three weeks in a row, according to the Mortgage
Bankers Association. Folks in the market for a refinance no doubt
sensed that rates were headed for a turnaround. Purchase applications
were down a bit.
Housing starts and home prices have been healthy, and that's a
consequence of the generally falling mortgage rates of the last
seven months. The Federal Reserve started raising short-term interest
rates June 30, and long-term interest rates are lower now than they
There has been some speculation that Greenspan, who is chairman
of the Federal Reserve, was glad that long-term rates dropped even
as the Fed elevated short-term rates. One or two pundits have opined
that Greenspan intended such a result all along, wielding words
and monetary policy like Minnesota Fats handling a pool cue, making
nifty bank shots.
But Greenspan told the Senate on Wednesday that he was surprised
when long-term rates fell. "This development contrasts with
most experience, which suggests that, other things being equal,
increasing short-term interest rates are normally accompanied by
a rise in longer-term yields," he said.
He mentioned a few possible explanations: that investors believe
inflation will remain tame far in the future; that investors believe
that the economy will grow at a slower-than-previously-expected
pace; that foreign central banks (chiefly Japan's and China's) are
gobbling up Treasury debt; and that globalization is forcing prices
None of these explanations is completely satisfactory, Greenspan
said, and he just can't explain what's behind the drop in long-term
rates. "For the moment, the broadly unanticipated behavior
of world bond markets remains a conundrum," he wrote in testimony
to Congress. "Bond price movements may be a short-term aberration,
but it will be some time before we are able to better judge the
forces underlying current experience."
In other words, he doesn't know. But his talk of a "short-term
aberration" reveals something else: Greenspan believes long-term
rates are past-due for an increase.