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Strategies & Market Trends : The Contrarian's Corner -- Ignore unavailable to you. Want to Upgrade?

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

Of course the yield on 30 year US Treasuries should increase as the Fed decreases short term rates. This has already happened. Over the past week the 30 yr has increased from 5.08% to 5.12% while the 90 day has decreased from 4.56% to 4.39%. A Depression with no outlook for recovery might push 30 year Treasuries down to 2%, but the slightest hint of inflation during the next 30 years would push yields up. The Fed easing monetary policy by lowering the overnight Fed Rate makes a Depression less likely and a robust economy producing asset inflation more likely.

To: HeyRainier who wrote (106)	9/27/1998 4:09:00 PM
From: Elroy Jetson	Respond to 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%).