Mortgages are close to 5.5 percent today for the lowest-fee deals – as low as at any time since March ’04. The ultimate driver, the 10-year-T-note, has stayed within a 4.16 percent-4.3 percent range for a month.

This stability in long-term rates – if anything tilting to the down side – is contrary to just about every forecast, whether published or talking-head. The yammering has gone like this: the Fed is marching toward 3.5 percent-4 percent or more from today’s 2.25 percent; and the dollar is sure to weaken further, which will cause both inflation and a demand for higher yields by foreign investors.

All clear, but the actual market has not played by the rules: save one week after Thanksgiving, the 10-year has not traded above 4.35 percent since last July.

Why are bonds so far off-script?

There is no answer in the pattern of economic activity. GDP baseline is close to 3.5 percent; inflation as measured by CPI reached 3.4 percent last year, but is tailing now, and the GDP deflator is trendless at 1.5 percent. Productivity may be fading a bit, but there is none of the traditional inflationary employment/consumption spiral to worry about. (For the best counter-argument to the rates-rising, economy-strong consensus, go to and read the newly posted “4th Quarter 2004 Review.”)

The dollar is stronger versus the euro, not weaker. This development is to me a first-class “Well, DUH-uh!”: the Fed is taking U.S. short-term rates from half of European ones to double, and interest-rate differentials cause more change in currency values than trade deficits.

The other dollar weakness has been versus the yen. This week officials from Japan’s finance ministry hit the road hoping to find foreign buyers for their government bonds, presently 95 percent held by Japanese citizens and institutions, and presently yielding 1.36 percent (10-year). They won’t find many. U.S. government debt is about 65 percent of GDP; Japan’s is 150 percent. Yes, Japanese are world-class savers, but an outright population decline there means too few future taxpayers per bond. The dollar is weak against the yen because of predatory trade practices (they sell and won’t buy) and incipient deflation, not because their economy is on a sound footing.

PIMCO, the giant of bond-market mutual funds, has re-thought its belief that the Fed would stop at 2.5 percent. An odd piece by their Fed-watcher, Paul McCulley, sees the Fed worried about speculation in the economy, possibly housing, possibly somewhere else (one candidiate: easy sales of new bad-credit bonds at absurdly low yields). Maybe, but there is nothing inflationary in evident speculation – even the reddest-hot housing markets are starting to cool.

One last-ditch theory useful in inexplicable markets: when the price of any financial commodity seems higher than it “should be,” the cause is more buyers than sellers. (Works in reverse, too, explaining sudden crashes.) Stripped of smart-ass, from what unusual source might an excess buyers come, or a shortage of sellers?

Two places. There is an extreme shortage of new mortgages for sale, now that the refi booms have stopped, and the shortage forces long-term investors to buy other bonds. On the buy side there is a persistent excess of bids coming from the exploding costs of pension plans, public and private, worldwide: pension plans must buy long-term bonds to cover the rapidly growing liability to pay everything from annuities to pensions to health plans to death benefits.

For a demographic surprise, go to, and study the May ’04 issue’s “Global Baby Bust.” Populations are aging not just here and in Europe and Japan, but everywhere.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


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