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Monday, June 06, 2005

Greenspan comments on interest rate divergence

This article indicates that Greenspan is befuddled by the fact that long-term interest rates have fallen in the face of 8 sequential Fed rate increases. Some people suspect foreign governments buying large amounts of US securities, but Greeny indicates that they have ruled it out with a special study they performed.
A couple of comments:
1. The answer is always in supply and demand. I think the reason why long-term rates are so low is because there are a lot of lenders looking to provide capital to good credits on a long-term basis. Look at the home mortgage market -- it is much easier to get a mortgage today than it was 10 years ago. I was speaking to a mortgage broker the other day who only did loans to 'subprime' prospects (i.e. filed bankruptcy previously). He commented that he couldn't believe that one of his clients took a loan at 11.3% - fixed for three years. I thought to myself, who is the sap that loaned $250K to someone that filed for BK and is only getting 6% above treasuries. Obviously, there are many, many businesses and professionals whose only goal in life at the moment is to lever your ass up to the hilt. I find that when business interests, careers and paychecks are aligned towards a goal, a little thing like the Fed's opinion on rate levels will not get in the way. Sorry Greeny.
2. I'd like to see this 'special study' Greeny talks about regarding foriegn investors. I'm not sure that I trust any government (or quasi-government) study right now. The only source for information worse than Big Media is the Government; and that's sayin' something.

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