The 10-year Treasury note has held below 4.75 percent, in turn holding mortgages below 6.5 percent, both despite certain knowledge that the Federal Reserve will raise its overnight rate on Tuesday to 4.75 percent and very likely signal intentions for one or more hikes ahead.

After next week, the Fed will not meet again until May 10. If the economy does not tank in the meantime, and markets follow the mechanical pattern of the last two Fed hikes, then in April the 10-year note will move toward 5 percent and mortgage rates will rise above 6.5 percent.

The economy is a long ways from the tank, but the newest data are nowhere near as strong as the stock market boomers would have it. Orders for durable goods, a key barometer for business investment and confidence, were flat in February (ex-aircraft). The first gain in sales of existing homes in six months had help from warm weather, but new-home sales dived 10.5 percent anyway. Mortgage purchase applications fell again, down 26 percent from last June; the economy-lubricating refinances down 47 percent.

Federal Reserve Chairman Ben Bernanke this week gave his first big speech. His writings before he sat down in the chair were fluid prose, rich with imagery and explanations useful for civilian readers. This first speech was anything but that; this one was in the style of a top-gun professor to an unruly crew of Ph.D. candidates whom the professor thought needed to be taken down a peg.

Former Fed Chair Alan Greenspan wrote and spoke in a kind of genetic code, pages and pages of ACTCAGTTTACTCGACT…, 95 percent of it filler, only one short sequence the active gene. Bernanke’s address on Monday night did not have a single phrase of filler, nor the slightest obfuscation. He spoke on the yield curve and “Greenspan’s conundrum,” the first-time-ever stability of long-term rates during sustained Fed tightening. 

His blunt message: I’ve got several hundred economists here at the Fed, and I’ve asked them the same conundrum questions that you’re asking and more that you haven’t thought of; we’re on top of it, you need not bother about it, and for the moment the flat yield curve doesn’t mean a thing. But, if you insist, I’ll tell you specifically why you shouldn’t worry.

Like this. Two general forces may be holding down long-term rates: special factors and macroeconomic ones. The special effects: relatively stable inflation and low overall economic volatility (a strong maybe), or intervention by foreign governments (nope), or new bond-buying pressure from pension funds (uh-uh), or a shortage of long bonds (a weak maybe). It’s a good thing that none of these forces amount to much, or he says the Fed would have to tighten against them.

The macroeconomic forces: previous flat curves accurately predicted slowdowns (not this time: prior ones were at much higher rate levels); or the economy may face new drags from energy costs and slower growth in house prices (could be, not now).

There. An inside look at the Fed’s analytic horsepower. Confounding three generations of bond traders, at this moment the yield curve is not useful as a guide to anything, if only because the Fed says so and isn’t paying attention itself. Bernanke’s apt conclusion: “First, determine your position frequently. Second, use as many guides or landmarks as are available.”

So, what other guides or landmarks is Bernanke watching? Properly, he isn’t saying, but it’s easy to guess. The Fed is stuck with traditional and low-precision stuff: job market overheating or cooling, signs of excess or unwinding financial leverage, systemic credit quality, and plain, old consumer spending. And housing.

Note: Merrill’s index of bond-market volatility has reached an all-time low, trending down since 2003. Volatility in markets always reverts to mean, and tends to do so explosively, punishing the complacent; the last low was in 1998, just before the LTCM blow-up marked the advent of several exciting years.

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

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