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No longer perverse

By Holden Lewis ·
Friday, July 8, 2011
Posted: 3 pm ET

Mortgage bond yields finally fell today, as they normally would do after the release of a horrific monthly employment report.

Yields on Freddie Mac mortgage bonds have fallen 9 basis points since yesterday. The yield on the 10-year Treasury has fallen even further. As I write, it has fallen 14 basis points, to 3.02 percent.

This means that investors' demand for Treasury notes is relatively greater than demand for mortgage bonds. In normal times, that's understandable. But in less than a month the United States could default on its debt and stop paying coupons (temporarily) on Treasury notes. Meanwhile, homeowners will keep paying their mortgages.

So why aren't investors snapping up mortgage bonds at the expense of Treasuries?

I assume a basic fact has eluded me. Maybe a default doesn't mean the government will stop paying coupons on Treasury notes. Inform me of my ignorance in the comments.

While you're at it, follow me on Twitter @HoldenL or I'll write mean things about you.

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