Mortgages traded up last week from too-good-to-be-true 5.5 percent to 5.75 percent, taken there by a surge in the 10-year T-note from just under 4 percent two weeks ago to 4.26 percent this morning.

The first leg of the rise was unmistakably Federal Reserve Chairman Alan Greenspan’s work; the second, Friday, from new data suggesting of inflation.

In reverse order, data first: the core rate of January producer-price increase shot up .8 percent, but was overstated by oddities: tobacco, alcohol and withdrawal of auto-price incentives. Claims for unemployment insurance have fallen to the 300,000-weekly zone, best in five years, and housing starts reached a 21-year high (insistent housing-bubblologists might note that U.S. population reached a 229-year high).

Greenspan wore his age well in his testimony to Congress, his mind bright and clear, but vigor – his sheer force of personality – on the wane. Now 11 months to retirement, he gave us one more oblique caution, intentionally imprecise but his usage guaranteed to emphasize: “For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum.”

Broadly unanticipated…no foolin’: nearly everybody for two years has been certain that bond yields would rise. The Fed has raised its overnight cost of money from 1 percent to 2.5 percent, and bond yields have come down from 4.8 percent. Late in tightening cycles such a “yield curve flattening” is routine, and a warning of recession to come; early in tightening cycles…flattening just doesn’t happen.

It has, now. Could the flattening be a warning to the Fed that it is in the process of overdoing its rate hikes? “This interpretation does not mesh seamlessly with the rise in stock prices and the narrowing of credit spreads….” and “…only a portion of the decline… is attributable to a drop in long-term inflation expectations.”

The Chairman knows that everyone in the markets knows that the Fed takes very seriously bond-market signals as to its policy. He also knew while composing his remarks that his “conundrum” line would be the centerpiece. Did he intend a warning? You bet! However, commentators since who say he intended to correct a bond-market misinterpretation, and to drive yields up where they belong… I am struggling to remain polite to those like PIMCO’s McCulley who announced Friday that the Chairman meant to say that bonds are “…in a bubble, but he couldn’t say that.”

Greenspan says exactly what he means; a “conundrum” is a riddle, one quite likely puzzling to himself as well. If he intended to expose market foolishness, he was perfectly capable of doing so, as he has before with fearless exuberance.

It may be that foreign central-bank mania for accumulating dollar reserves is causing a distortion, or demand for long assets to offset pension liabilities, or any number of things, including foolishness.

On the other hand, bond-market behavior may be flashing the traditional warning: stocks look shaky, not strong; credit spreads are narrow, but maybe because investors desperate for yield are overpaying for lousy credit. The most important news last week has been ignored: in new revision, Japan is back in recession, its economy contracting in the last three quarters of ’04, and Germany and Italy slipped to negative GDP in the 4th quarter. Bond yields are down or falling everywhere as economies falter under the weight of aging populations, and their dependence on America to soak up their exports, frustrated by a weak dollar.

Two more things from the Chairman, ignored: “…The real Federal funds rate… remains fairly low” – “fairly” is near-neutral language. Second, he described lagging capital investment as “most unusual,” and a continuing drag on hiring.

I think it wise to take the Chairman at his word: this is an atypical economic recovery and global situation, a conundrum to reveal itself on its own.

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


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