Robert Trudeau

A Warning in the Bond Market

The problem was created when Wall Street created mortgage products that allowed Main Street to by houses at absurdly high prices. I don't know of anyone on Main Street who went to Wall Street and asked them to pool negative amortization mortgages into CDO's. Moving forward, most folks will not buy houses based solely on the monthly payment, they'll buy based on what they think the value of the house will be 5-10 years down the road when they want to sell. People aren't dumb, they just hadn't seen falling real estate prices like we have today, and most weren't around during the Great Depression. They have been educated.

A Warning in the Bond Market

I respectfully disagree with nearly everything you have stated. Investors WILL accept 2.5% on a 10 year if they believe that there will be no inflation, or possibly deflation, over that time frame. A real return of 2.5% on bonds is attractive, and about in-line with histroical returns. The Fed does not control interest rates, the global market does, that is why their are treasury auctions. If the Fed had its way, long-term rates ie. mortgage rates would be much lower than they are today. The Fed doesn't fund mortgages, investors do. What the Fed can do is dump money into the economy at low interest rates and it has done so, with M3 growing by about 18%. The temporary spike in interest rates on the 10 yr is due to the fact that the market now believes the worst is behind us and that the economy will continue growing. Don't believe in efficient markets.