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Strategies & Market Trends : The Contrarian's Corner

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To: HeyRainier who wrote (106)	9/27/1998 4:09:00 PM
From: Elroy Jetson	of 113

While yields on 30 yr Treasuries may rise as the Fed lowers the short term Fed Rate, the rate on 30 yr fixed home mortgages may fall. Why the paradox? Because of the current risk of recession/or worse, plus the unfavorable pre-payment history of mortgage backed bonds (as people re-finance at lower rates), the "risk premium" between Treasuries and Mortgages has increased to 1.65% (5% vs ~6.65%). As long term Treasury rates stabilize and increase, and the risk of recession becomes less, this risk premium will decrease to say 1% perhaps (5.25% vs 6.25%).

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