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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (13099)	5/3/2004 6:37:04 AM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 110194

it's just an idle speculation on Mauldin's part. there's no way to determine if and when there would be a "false positive" because, even though the 10yr isn't set by the Fed, it is obviously influenced the very low short rate and thus probably hundreds of basis points lower than where it would be if the policy rate were at 4%. the reason is, there is already a huge arbitrage opportunity with a 350bp, historically wide spread creating a very large incentive to borrow short. in brief, there is high demand to borrow at the short end where supply is basically infinite (thanks to the Fed), so there is lower demand to borrow at longer maturities (reducing the yield), and greater interest for carry arbitrageurs to extend credit and capture the spread. it is not a coincidence that financial profits are at an all-time high. your own example of switching to a very short-term ARM in place of a longer fixed mortgage shows how borrowers are heavily incented to take advantage of the artificial short rates, and simultaneously, this reduces demand for longer rates. thus, not only can we not say where the "natural" short rate is (except that it is higher than 1%), we can also not say where the longer rates would be, either (except that they, too, would be higher).