Yield Curve & Mortgage

What is 'Yield curve'? Simply Plot today's yields for various maturities of U.S. Treasury bills and bonds on a graph against years of their term and you get today's yield curve. A normal curve is one that increases from shorter to longer term -- which agrees with our intuition of what the yield should be.

On Tuesday, however, the bond market saw the yield curve invert between the key 2-year and 10-year maturities for the first time in 5 years [To look at yield curves, visit StockCharts.com. Today's curve is staying normal] . As you know by now, an inverted yield curve occurs when short-term bonds pay higher interest rates than longer-term maturities.

Obviously, this happens when long-term investors decide to settle for lower yields even though the short-term investment is so much less risky, thinking that rates — and the economy — are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.

Many experts believe it's signaling a slowdown in growth. They have history to support that observation: This unusual event has foreshadowed the last six recessions, although not every instance of inversion was followed by recession. This has influenced many aspects of the financial world this week -- stock trading, economic projections and financing decisions at the nation's banks that find themselves challenged by higher short-term borrowing costs and less payout on longer-term loans. It's highly likely that this sentiment was instrumental in the fall of both Dow and Nasdaq in this last week of 2005.

And it influenced mortgage market too. Here are details of mortgage market:
According to Freddie Mac's weekly report, the 30-year fixed rate averaged 6.22%, down from 6.26% last week. Last year at this time, the 30-year averaged 5.81%. The 30-year rate will average 5.87% in 2005, nearly in line with 2004's 5.84% average. The average 15-year fixed-rate loan was 5.76%, down from 5.79% a week ago. The rate compares to 5.23% at this time in 2004.

Five-year Treasury-indexed hybrid ARM (Adjustable Rate Mortgage) averaged 5.79% this week, down from last week's 5.82%. One-year Treasury-indexed ARMs averaged 5.15%, down from last week's average of 5.22% - about 1% higher than what it was one year back.