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30-year rate rises for first time in 2005

Alan Greenspan didn't intend to make long-term interest rates fall last year, and he doesn't know why they did.

It's easier to explain why mortgage rates rose this week after six straight weeks of declines. The 30-year fixed-rate mortgage went up for the first time this year.

The benchmark 30-year fixed-rate mortgage rose 3 basis points to 5.62 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.31 discount and origination points. One year ago, the 30-year fixed mortgage rate stood at 5.58 percent.

The 15-year fixed-rate mortgage rose 2 basis points to 5.17 percent. The one-year adjustable-rate mortgage fell 3 basis points to 4.44 percent.

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Two things happened to make mortgage rates move upward. The first was the release last week of jobless claims numbers from the previous week. About 303,000 people filed for unemployment in the first week of February. That was the lowest jobless-claims number since October 2000. Wall Street took the development as a harbinger of rising wages in the future, and that means inflation, and that means higher long-term interest rates.

The other thing that happened was the Treasury borrowed $51 billion to finance part of the federal budget deficit. The government borrows money by selling new Treasury notes and bonds. When the Treasury sold $51 billion in bonds on Friday, the bond prices fell -- just the reaction you would expect when so much supply is dumped on the market in one day. When bond prices fall, the yields rise. That's what happened, and mortgage rates followed.

Homeowners demonstrated good timing -- applications for mortgage refinances have gone up three weeks in a row, according to the Mortgage Bankers Association. Folks in the market for a refinance no doubt sensed that rates were headed for a turnaround. Purchase applications were down a bit.

Housing starts and home prices have been healthy, and that's a consequence of the generally falling mortgage rates of the last seven months. The Federal Reserve started raising short-term interest rates June 30, and long-term interest rates are lower now than they were then.

There has been some speculation that Greenspan, who is chairman of the Federal Reserve, was glad that long-term rates dropped even as the Fed elevated short-term rates. One or two pundits have opined that Greenspan intended such a result all along, wielding words and monetary policy like Minnesota Fats handling a pool cue, making nifty bank shots.

But Greenspan told the Senate on Wednesday that he was surprised when long-term rates fell. "This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields," he said.

He mentioned a few possible explanations: that investors believe inflation will remain tame far in the future; that investors believe that the economy will grow at a slower-than-previously-expected pace; that foreign central banks (chiefly Japan's and China's) are gobbling up Treasury debt; and that globalization is forcing prices down.

None of these explanations is completely satisfactory, Greenspan said, and he just can't explain what's behind the drop in long-term rates. "For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum," he wrote in testimony to Congress. "Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying current experience."

In other words, he doesn't know. But his talk of a "short-term aberration" reveals something else: Greenspan believes long-term rates are past-due for an increase.

-- Posted: Feb. 17, 2005
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5/1 jumbo ARM 3.70%

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