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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Les H who wrote (198702)10/19/2002 1:01:48 PM
From: Les H  Read Replies (1) of 436258
 
An increase in mortgage rates creates a vicious cycle that may end up forcing bond yields higher, too. Market watchers say mortgage players have been selling large amounts of U.S. government treasuries in recent days.

As several homeowners have refinanced their mortgages, taking advantage of low rates, the prepayment risk has risen for mortgage companies. Mortgage managers have hedged against this by buying, among other debt, U.S. treasuries.

With yields rising, the prepayment risk has lessened. Mortgage managers are overexposed to government bonds and keen to cut their holdings. But as they sell their bonds, the influx of supply depresses bond prices and pushes yields yet higher, so further lessening prepayment risk, causing a self-fulfilling prophecy of simultaneously rising bond and mortgage rates.

For that reason, strategist Tobias Levkovich at Salomon Smith Barney said the rise in yields is good news for stocks, but could choke the housing boom.

"Higher U.S. treasury yields rates could beget even higher rates as momentum swings the other way," he said in a note yesterday. "Investments such as U.S. equities should benefit, but housing could suffer somewhat as mortgage rates are tied to bond prices."

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