Low Mortgage Rates Defy Expectations

Economists are now studying the "conundrum" intensely, finding a variety of partial explanations.

Some point to short-term issues. For example, one factor that helped push down yields yesterday was a Fed official who implied in an interview that the central bank would stop raising its benchmark rate after its meeting later this month. Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said during an appearance on cable network CNBC: "We're clearly in the eighth inning of a tightening cycle. . . . We have the ninth inning coming up the end of June," according to a partial transcript by Bloomberg News.

Fed officials are likely to raise the funds rate to 3.25 percent later this month. Wall Street analysts widely predict that the Fed will keep going, lifting the rate to at least 3.75 percent in coming months. If the Fed pauses after the June meeting, other rates may stall as well.

Fisher's comments touched off a trading frenzy, increasing the already voracious hunger for long-term Treasuries.

Oil-producing countries, for example, have reaped a profit windfall over the past two years as crude prices rose from around $35 a barrel to above $57 a barrel in early April. Oil trading is denominated in dollars, so many producers have parked their profits for the time being in U.S. Treasuries.

The recent downgrading of debt issued by General Motors Corp. and Ford Motor Co. have prompted some investors to move money from corporate bonds to Treasuries, which are considered extremely safe investments because a U.S. government default is so unlikely.

Meanwhile, many hedge funds and traders have bet wrong on a variety of investments this year -- expecting, for example, that GM debt would rise in value or that long-term interest rates would rise. The resulting turmoil in the markets in recent weeks has caused some investors to seek the "safe haven" of Treasuries, analysts said.

The fall in mortgage rates has also caused portfolio problems for some institutions that own mortgage-backed securities. As a result, they have had to buy more long-term securities, causing rates to fall further, said Michael Decker, senior vice president of research and public policy for the Bond Market Association.

Combined with these short-term factors are long-term economic conditions.

Yields are relatively low throughout the industrial world in large part because the Fed and other central banks cut their short-term rates low in response to the 2001 recession and have held them relatively low since then.

Inflation has also been extremely low in recent years.

By raising short-term rates by two full percentage points in the past year, the Fed has assured most investors that inflation is under control, some analysts said.