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ARMs Reset Problem No Problem at All

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Mortgage relief pending for many.

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I'm taking another look at the yield curve: How it affects pay-option ARMs, interest-only mortgages, and standard 3-1 and 5-1 ARMs.

There's much good news to report. Let's start off with a peek at the yield curve itself.

Treasuries Yield Curve


Click to enlarge
Chart courtesy of
Bloomberg

The yield is now 2.60%; those long Treasuries or the Treasury ETFs such as TLT (the Lehman 20+ Year Treasury Fund) or IEF (the Lehman 7-10 year Treasury Fund) have benefited handsomely.

Bullish Flattening Still In Progress


Click to enlarge


Notice the difference between the 2003 re-inflation effort by the Fed, and the current one. Top to bottom, the difference between the 3-month yield and the 30-year yield is much smaller. This was an enormous Treasury rally - and most missed it.

There's one more piece of information needed to discuss how this is all affecting mortgages and that is LIBOR.

Key Benchmark Rates



Note how existing mortgage rates have barely dropped in spite of a massive decline in yield on the 10-year Treasury to which fixed mortgage rates are tied. I called for this disconnect 3 years ago on the basis of rising default risk. We have certainly seen that in spades.

Of far more interest to Bernanke than new mortgages, however, are the masses of people in pay-option ARMs, interest-only mortgages, and regular ARMS which are about to reset.
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